From here to austerity

There were a few aged faces among the Conservative faithful listening to his speech who may have thought they had heard a similar warning decades ago. In immediate post-war Britain, the then ­chancellor, Hugh Dalton, knew that Britain’s empty coffers meant ­nothing was going to be easy.

That period of drab clothes, bomb sites, long faces and long queues has since been called Austerity Britain. George Osborne had just promised its ­painful return.

In order to “reduce the ­largest ­deficit in our modern history”, Osborne introduced the Tory equivalent of Dalton’s decision to continue rationing.

To reduce the black hole of Britain’s current annual deficit of £175bn, Osborne said Britain required a new collective sacrifice where all but the poorest would be asked to contribute. The shadow chancellor wasn’t asking for a debate on the options before him; he was saying there was now no choice. Austerity or bust was his message.

“Anyone who tells you that these choices can be avoided is not ­telling you the truth,” he said. “We are all in this together.”

Osborne spelled out cuts that represented £23bn over the length of the next parliament: a pay freeze for public-sector workers earning more than £18,000; cutbacks that would avoid the imminent loss of 100,000 public-sector jobs; a £50,000 cap on the pensions of civil servants, town-hall bosses and quango chiefs; initiatives to cut the cost of Whitehall by a third, or roughly £3bn; withdrawing tax credits for families with incomes of more than £50,000; new restrictions on child trust funds; and a threat to bankers and undeserved bonuses.

According to the former chancellor, Ken Clarke, Osborne’s austerity list was “only a sample” of what was needed.

This means that the real force of the “we’re all in this together” message rests not on what Osborne included, but on what he felt he had to leave out.

The Institute for Fiscal ­Studies tried to fill in the obvious gaps. Its director, Robert Chote, said the austerity measures Osborne had outlined amounted to only “a dent” in the proclaimed target of halving the deficit by 2014.

Despite announcing pain, Osborne had merely described one-sixth of what was needed. So if the shadow chancellor has only spelled out a fraction of what is needed to address the structural shortfall of Britain’s ailing economy, where is the rest of pain going to fall? In austerity Britain, who else, apart from the public sector, is going to feel the pain?

There is one obvious idea that neither Labour nor the Conservatives have so far mentioned in any detail. This does not involve the imminent reduction in the cost and size of the state, but rather the necessity of the state to substantially boost the amount of money it raises. In other words, raising taxes.

Saving around £80bn will mean a hybrid package of spending reductions and tax increases, with the remainder expected to come from a return to growth. Except there is a flaw in this assumption, because austerity and growth don’t easily fit together.

VAT will rise, with 20% now almost a given among economic ­advisers to both main parties. National insurance is another clear target. VAT up to 20% could raise an additional £11bn, but it would do what Osborne said he wouldn’t do, and that is make the poorest pay adversely.

Although Osborne said he would be retaining the 50% tax band – because we’re all in this together, even the high earners – it is more likely that Labour will spell out a tax hike for those on higher incomes, as opposed to the Conservatives, who cannot afford to risk alienating ­aspirational middle Britain.

But with £2bn to be gained from the 50% tax rate applied to those earning over £100,000, the prize of temporarily tinkering with the thresholds may be difficult to ignore if the austerity medicine isn’t working fast enough for either party.

With a sizeable raid on income tax regarded by both Tories and Labour as a political loser, pre-election at least, tax revenues will have to come from elsewhere. Stealth taxes have been a signature of Gordon Brown’s budgets over the past decade. And stealth-tax pain in austerity Britain is likely to have its volume turned up: so far, land-value taxes, carbon taxes, and new taxes for City and financial operations have been proposed. With both parties targeting a return to growth, balancing the stream of new income coming into the Treasury, while trying to offer reassurance that consumption and business is being encouraged, will be a difficult act to pull off.

Neither the Treasury nor its shadow equivalent has spelled out which part of the state will be shrunk. David Cameron’s leader’s speech offered no specifics other than blaming big government. Britain spent more than £620bn last year. Schools, children and families accounted for £63bn, communities and local government nearly £40bn, work and pensions £135.7bn, the NHS £94.5bn, defence nearly £45bn, international development £5.2bn, transport £15bn and devolved spending to Scotland £33bn. What bits go, what gets shrunk, what stays? Trident? The schools budgets? Roads? Rail? Culture budgets? Neither of the main parties has been courageous enough to offer a list, and only once the election is past and a new government is formed will the lists appear.

Osborne spelled out the “clear and present danger” of spiralling borrowing. But beyond that? He might have forecast the arrival of austerity Britain, where the state would shrink, where tax would rise, where the collective pain would be shared, but how long would it last?

Neither Osborne nor Cameron offered any firm economic insight into how the downturn would end. And if there is no encouragement that recovery is imminent, the necessary return of growth needed to make the £175bn debt level

shrink won’t add up.

Without the return of growth, austerity Britain in 2010 could last far longer than Dalton’s.

Gordon Brown is pinning his final hopes on the assumption that growth will have returned by the election. Despite the cuts Labour are already planning, after their period of in-house denial, Brown’s avoidance of austerity ­Britain will, he claims, be made possible by a rising tide of optimism.

In a newspaper interview this weekend, the prime minister predicted strong growth over the next year. He said: “I think people have moved closer to our view that Britain is capable of coming back to growth at a higher rate next year than people were originally assuming.”

And in a direct contradiction to the predicted Tory pain, Brown said it was “simply not true” that tough years lie ahead. He branded the Tories “pessimists”, saying: “They’re for an age of austerity, they’re for cutting the help, therefore allowing unemployment to continue to rise. They are wrong about the recovery and wrong about growth.”

Labour’s response to the Tories’ week in Manchester now looks clear. For Conservatives, an age of austerity looms; for Labour, austerity Britain can remain in Dalton’s era. Brown said the NHS and Britain’s schools could not survive the scale of cuts the Conservatives are talking about.

Labour have so far not said where their own cuts would fall, but Brown nevertheless tried to draw a line between his party and Cameron’s.

“Do voters want a party that has a strategy for getting out of recession, or do they want a party that’s so pessimistic about the future that they’ll tell you in advance they’re giving you an age of austerity?”

So with parliament back to work in Westminster tomorrow, the theme of the first prime minister’s questions has already been set. Pessimism and austerity, or optimism and five more years of Gordon Brown?

WHAT IT COULD MEAN FOR YOUR FAMILY

MOTHER: Our imaginary mother is a 37-year-old who earns £25,000 a year working in the private sector.

If she is responsible for the family budget, she will have some new calculations to make.

Tax credits worth £500 a year would be withdrawn from families earning more than £50,000 to save £400m a year; child trust funds worth £250 would be limited to the disabled and the poorest third of families to save £300m a year.

A rise in VAT to 20% is expected. It is currently 15%, Alistair Darling having lowered it for a year to offset some of the credit crunch, but it is due to return to 17.5% in January.

Restrictions on benefits, with universal benefits replaced by means-tested ones, may follow.

Osborne said he would “preserve” child benefit, but that still leaves him room to preserve it for the poorest families, not all of them.

Child benefits currently stand at £20 for the first child and £13.20 for each additional child per week.

The Tories also plan to raise the retirement age for women to 67 in 2020.

FATHER: Our father is aged 42 and earns £31,000 a year as a civil servant. Tory proposals to cap his pension at £50,000 are unlikely to significantly affect him. He will, however, be hit by proposals to extend the retirement age to 66 from 2016 and by the expected pay freeze imposed on public-sector staff earning more than £18,000 a year.

As a public-sector employee in Scotland, his wages will be determined by the Scottish government, not Westminster. However, the public-sector pay freeze down south from 2011 will almost certainly spread north. Dad’s job security will be undermined by the focus on public spending cutbacks, and the £3 billion savings the Tories want in bureaucracy. Lower overall UK spending will directly impact on Scotland through the Barnett Formula.

CHILDREN: Our couple have two children, aged 10 and eight. If they have a third, he or she will no longer have a £250 child trust fund established by the government.

If they go to university, they will almost certainly face tuition fees. Some of Scotland’s universities are exploring opt-outs from the Scottish funding method, which could see their incomes rise.

All Britain’s political parties emphasise their commitment to education but, as David Cameron pointed out on Thursday, the UK government is already committed to spending more on debt interest next year than on schools.

If the children decide to enter the job market or seek benefits, the prospects are worse. The Tories want all 2.6 million people on incapacity benefit to be assessed to see what work they can do.

They expect 500,000 claimants to be found jobs or moved to jobseeker’s allowance, which pays £25 a week less. “Meanwhile, people in work are being asked to work even harder,’’ says John McLaren of Strathclyde University’s Centre for Public Policy for Regions. ‘‘We know a call centre where people are being offered 15-hour shifts.”

It’s too depressing to think what the pension age might be when our two children retire.

REACTION: ‘I’ve never known morale to be so low,” says Billy Kerr, a town planner at South Lanarkshire Council, which last week announced it would have to cut spending by £111m, or 12%, by 2013-14.

At 56, he will be one of the first wave caught out by the higher pension age.

“I thought I had nine years left, now I’ve ten.

“The Tories said we’re all in this together and we have to share the pain. But we never shared the gain in local government. We never got bonuses.”

His wife Lesley, who has been on incapacity benefit for back trouble since 1999, said the looming changes just added to people’s worries. “I had a test on Friday and an ambulance and paramedics had to take away one of the chaps being assessed. That was pure stress.”

Clare Simpson of Parenting Across Scotland, an umbrella group for some of the country’s biggest charities which is currently researching the impact of the recession on families, said worse is to come.

“I feel like you ain’t seen nothing yet. A lot of people feel they have not been affected as yet but I think it’s really going to start to hit soon. There will be a lot of cuts in council services, and in jobs. There will be lots of jobs lost in voluntary services. I think a lot of people are sitting there thinking, ‘Recession? What recession?’ but that will change.”

DOES IT ALL ADD UP? Robert Chote, director of the Institute for Fiscal Studies, said the Tory plans were a mere “dent” in the debt mountain .

“If the deficit is to be halved by 2014, the cuts, if they raise what they say, are still one-sixth of the whole of the tightening [required],” he said. In other words, austerity measures will have to be far, far worse than any politician dares admit.

John McLaren, from the Centre for Public Policy for Regions at Strathclyde University, said: “What matters is when they say how much each government department gets.”