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.

Being taken seriously

Guido rightly highlights how it was the Liberal Democrats were the first to take the lead on the public cuts debate and unlike the Tories kept closest to such a message during the campaign.  So it is ironic that discontent about cuts is supposed to be troubling the Lib Dem grassroots but not surprising.  First, the transition from theory to fact always causes such wobbles.  Second, it is easy to say something in the expectation you will not have to implement it yourself as one Lib Dem voter put it:

"I didn't vote Liberal Democrat so they would end up in government."

Third, it was a failure by some to understand that the Orange Bookers believed what they were writing and not simply doing so to eke a few more seats off the Tories.  Clegg's declaration that they have no future as a party of the left is a further example of this thinking. Fourth and finally, it is the price of governance and being taken seriously.

Troubled Mersey Waters

The Lib Dems are commencing their party conference in the city of Liverpool.  Party leader Nick Clegg is predicted an unsettled but not rebellious event.  The core of his argument to settle unease is that the success of the Coalition will be judged on its five years not the first five months;

"As people start seeing it is a plan that makes sense and will work, we will restore economic growth and confidence will grow."

The new Director General of the Institute of Economic Affairs issues the standard advice of what the Lib Dems need to do to survive as a strong separate entity:

"I think what they've got to try and work out, not just this week, but over the next few years, is what is the distinct Lib Dem message within the coalition? How does it differ from the Conservative message? What is the purpose of voting Lib Dem any more? Why not just vote for Conservatives if you like the coalition?  At the moment, I think largely because the senior members of the Lib Dems are in government having to run the country, not enough thought and attention is being paid to that."

The distraction of governance itself for a party not used to such a role should not be underestimated.  All of the parties in Northern Ireland are still wrestling with it to varying degrees of success even after three years.  While south of the border the omens for the smaller coalition party being able to have a distinct message while being in coalition don't augur well both now and in the past.  The stronger base of the Lib Dems in local government could be a means of maintaining a distinct message outwith the central government but for that to work it needs to weather the electoral storm that is coming.  Also any drift to the Tories at that level will further undermine the perception of the value of the Lib Dems. 

Pacts

Among the Coalition parties a debate about pacts is developing, encouraged by Nick Boles new book.  The Lib Dems are distinctly cool on the idea (a probably sign of the level of grassroots discomfort with the Coalition deal) while Tories are more open.  The opponents to the idea should perhaps be digging out Cameron's rejection of apcts on principle that he made here.

My instincts are that Tim Montgomerie has the advice right for the government.  It has a significant task and getting on with it should be the focus and the prospects of re-election left to the success or otherwise of that package of reforms.  This would fit with the Swedish experience.  Although as the Independent points out it could involve a reversal of economic fortunes in the short-term:

"the public will only support this idea if the results are both prompt and beneficial. If the savage wielding of the surgeon's knife delivers a rapid recovery to the nation's finances, Mr Cameron and Mr Osborne will have pulled off their bold gamble. But if deep cuts have the same results in Britain that they appear to have had in Ireland, pushing the country deeper into recession, support for Mr Osborne's policies will collapse. "

As to Boles idea of concluding a pact sooner rather than later this is probably a recipe for greater instability rather than less.  It would bring Lib Dem internal tensions to a head very quickly.  The Coalition deal and the political difficulties it will face makes a schism in the Lib Dems a distinct possibility.  This is the political plan B that the Coalition should be considering.

Yep

Base, how low can you go?

25-5 is the prediction of one Lib Dem Cabinet minister of the respective poll positions of the Conservatives and Liberal Democrats this time next year with the theory that fear will hold the Coalition together.  It may hold the Westminster parties together but anything like such a performance in the local government elections will have a devastating impact upon the Liberal Democrats in particular with an internal war or loss of activists or both highly likely.  The Rawnsley piece argues that the 1920's are the historical precedent:

"There has not been a spending squeeze like it, remarks this minister with a sense of history, since "the Geddes Axe". Then, too, Britain was ruled by a Tory-Liberal coalition. Then, too, its policy was driven by alarm about the national finances, in that case the debt run up during the First World War. Sir Eric Geddes, a businessman, was put in charge of a committee to recommend cuts. By the time his blade had stopped swinging, the defence budget had been slashed by more than 40% and the number of civil servants had been reduced by over a third."

In terms of media and message the cuts programme is essentially a crisis period with the standard advice to have a strong media presence with a consistent message. Yet it seems to ensure the latter the Coalition is foregoing the former.  Neither will it be helped if the sense that Osborne is enjoying is role takes hold.

On a local level those who think we can keep simply get immunity from what is coming down the line should heed these warnings:

"The cabinet minister leant back into his chair and took a fortifying swig of his drink. Then, in a voice that blended bravado with fatalism, he said: "It's going to be absolutely horrendous. We're doomed to be extremely unpopular. Doooomed."  He was anticipating the public reaction to the ferocity of the spending squeeze that George Osborne will unveil in just five weeks' time. Put aside everything else that has occurred in the life of the coalition to date. None of it amounts to anything more than foreplay compared with the comprehensive spending review, the results of which are scheduled to be announced on 20 October."

Darling offers an answer

Peter Hoskin highlights how Alistair Darling may have happened on an answer for Labour to blunt Con Dem Coalition attacks on Labour and the public debt.  Namely the spending policies were endorsed for a number of years by the Conservatives, a commitment that lasted until November 2008. 

The squeezed middle

Tim Montgomerie highlights an interesting piece by Mary Ann Seighart about how Labour can work its way back electorally.  It begins with the premise that:

"if anyone is going to bear the financial brunt of the new austerity under this government, it is likely to be middle-income voters."

She highlights how media misdefinition has hampered understanding of who the middle is in the UK:

"I say "middle-income" rather than "middle-class" deliberately, for there is a notorious tendency among well-paid metropolitans to assume that the middle classes are simply people like them."

She highlights how this misdefinition then results in bad suggestions:

"Median gross annual earnings in 2009 were £20,801. That is not a lot of money. These people are unlikely to say, airily: "I really don't deserve child benefit. I ought to donate it to Water Aid." Tax credits, introduced by Labour, have helped them enormously, and they dread losing that buffer against debt. They fear for their jobs and, if they are close to retirement, they know they will rely on the winter fuel allowance to be able to pay their heating bills."

The flippant manner in which introducing water charges is talked about by some is perhaps a local example of this mentality.  The desire for 'progressive' cuts intensifies the effect on people in the middle income bracket:

"The Liberal Democrats are keen to make the cuts as progressive as possible, which means targeting middle-class benefits...If Iain Duncan Smith is to find the money needed to help ease the transition from welfare to work, he can hardly raid benefits for the poor while keeping them for the middle classes. One way or another, then, it is middle-income voters who will lose out."

After a range of policy ideas (some good and some bad) this leads to the conclusion that:

"So the left-right divide at the next election is likely to be between one party arguing for a universal welfare state in which people who put money in can expect to get something out, and two parties arguing for a pared-down version that only helps those in need. In that case, Labour would be campaigning for the middle classes and the Coalition for both the poor and the rich. If you thought coalition government threw up unexpected political alignments, you ain't seen nothing yet."

Perhaps the Sun is attuned to this income group with its displeasure at the no tax cuts in this term talk. 

However, there is a potential timing issue with this theory and how much the dire talk is an exaggeration. If the Coalition goes the distance an election is 4 and a half years away if the economy has recovered by then what has been cut may not be as much of the debate as it is now.  Also its good policy right now to be a doom and gloom merchant.  It can be an attempt to establish a 'virtuous'cycle and show clear purpose to the money markets that the issue of the deficit is taken seriously.  Yet the lesson from other countries tends to be that doom and gloom doesn't prove to be as bad as expected with a strong recovery.

For example, the Treasury predictions of this year's deficit proved to be over-estimation of nearly £20 billion.  While it's too soon to make definitive statements on growth (and the American economy looking dodgy is a cause for concern) we have achieved more growth in the first six months than the official prediction for the entire year.

Hence it could very well get better sooner than people expect increasing the Coalition's options in advance of an election.  The squeeze could have been eased before people go to the ballot box in a Westminster election but to get there the Coalition has to hold together through some bad election results particularly next year.  The potential for a split in the Liberal Democrats is real although the scale of it would determine whether the government could continue or make a deal with a smaller party.

Sooner rather than later

The latest Conservativehome survey of Conservative party members shows a small majority in favour of a non-aggression pact with their Coalition partners where they are the top two parties.  The primary argument against it is maintaining voter loyalty, organisational machine and potential impact upon other levels. As Tim Montgomerie sums it up:

"What’s the point of having a Conservative organisation in a seat such as Torbay if it is not allowed to challenging the sitting Liberal Democrat MP? If the Tories don’t fight every seat, the United Kingdom Independence Party or a new right-of-centre party could use the abandoned territory as launch pads for local, European and other elections."

Remember AME

Tomorrow will not be a happy day for anyone as the Con Dem Coalition presents its emergency budget. Judging by the 'authorising environment' leaks VAT will be the headline story - something that Taxpayers Alliance has pointed out neither party has a mandate for:

The justification that they didn't know how big the hole was especially on debt repayment levels doesn't hold water. The Institute for Fiscal Studies was well aware of it (pdf file) but somehow we are expected to believe it escaped the notice of the Conservatives and Liberal Democrats. Also the fact that the budget deficit of the year has decreased undermines this as well but only slightly as a deficit of over £150 billion as opposed to over £170bn is not a case for reaching for the champagne bottle.

However, the doom and gloom now has an economic and a political purpose. Economically, the aim is to create a virtuous cycle - paint it as bleak, act as if it is bleak and then take the confidence boost when things (hopefully) don't turn out as bleak. Politically the logic is that a bit more pain now will actually create more breathing room later. Essentially, when will an extra billion here or there get you a political reward - in the next couple of years by dissipating a little the depth of cut or a tax cut/boost to health in the year or so before an election?

In terms of Northern Ireland, the public discussion has been upon the Departmental Expenditure Limits, commonly referred to as the block grant. The broad shape should become clear in tomorrow's budget but the full detail will be from the Comprehensive Spending Review later in the year. However, in terms of the economic impact we need to remember the Annually Managed Expenditure (AME), essentially welfare/transfer payments. From the leaks it is clear those on benefits will be taking a hit as well.

So it is likely the Northern Ireland economy will receive a double gut punch not one in the short-medium term due to its reliance on the public purse. This makes the Coalition talk of bolstering the private sector in the regions and particular areas like manufacturing even more important but to date they seem to be something jotted down on the back of an envelope rather than serious proposals.