Thursday, 7 October 2010

Cuts Plan B

Whilst chatting to a friend last night he reminded me of Michael Portillo's comment that the cuts would prove much harder in reality to deliver than the Tories seemed to imagine after the election.  The Financial Times (registration required) this morning made a similar point:

"Confronted with the difficulties of quickly cutting spending – including financial penalties for breaking contracts and redundancy costs – ministers have been forced to consider delaying some of the big savings until later in this parliament."

This means Treasury officials are developing a Plan B for the cuts programme:

"The Treasury is working on plans to “reprofile” spending cuts next April, spreading the pain of deficit reduction more evenly over the next few years, senior Whitehall officials have told the Financial Times."

The same amount gets cut but less now more later. The danger of such a step is twofold. First is market reaction.  Will it be interpreted as a loss of political will thus leading to a more neagtive market perspective on the future of the British economy?  A Goldman Sachs analyst argues how it is explained to the markets will be key:

"If people were clear about the reasons for any delay [to spending cuts] rather than suspecting a political wobble ... I don’t think [investors] would change their mind about the risk premium on gilts,"

Although the wobbling over child benefit earlier this week will increase suspicions.  Second, in the short-term, the Labour Party could try to do a partial victory lap.  They could argue it is a de facto adoption of what they planned to do in the next couple of years at least. However, if they do do this it limits their ability to object to try and ride any anti-cuts sentiment.

It may also mean that the appeal for a change in approach from the devolved institutions may not fall entirely on deaf ears.

1 comment:

Andrew said...

I listened to the responses today from messrs Robinson and McGuinness on 'the cuts'.

For them it is simple; spending encourages growth. Nevermind that this is a highly contestable claim, according to Martin it doesn't take an economic genius to figure it out - Reducing Public Sector spending will put the 'recovery' at risk.

I might be wrong but it seems to me that the alleged economic effect of cuts is a mere rationalisation for a desire to avoid the unseemly business of Public Sector job losses and service reduction.