The sheer nastiness of the Osborne budget takes some getting used to, but it repays closer analysis. To feed the Government’s ideological obsession that not a penny more must be borrowed, the supposed growth projects (which appear very hazy and may take 10 years to come to fruition, if ever) are being funded by public sector pay cuts and benefit cuts. These £1.2bn cuts via child tax and working credit and working tax credit savings will disproportionately hit the poor: the poorest fifth will have to stump up 32% of the savings and the richest fifth just 6%. But what is so cruel, and insane, about this manoeuvre is that it is also pointless. The deficit will be reduced by the cuts, but then grow again when the shrinking of income in the hands of the poorest families reduces demand and thence lowers government revenues.
Osborne has got himself into a complete double-bind. The more he hits public sector workers, to kickstart growth, with pension cutbacks and an extended pay freeze, the more the level of aggregate demand goes down and tax receipts to the Exchequer slip, forcing him then to borrow more to fund the gap in his revenues. Last year he had to borrow £46bn more than he planned for this purpose, and now lower growth over the next 5 years means he will have to borrow £111bn more than planned. There are two disastrous consequences to this process. One is that he actually has to borrow more than the amount of borrowing he started out with. The other is that because this self-defeating, it won’t come to an end even in 2017 after another 6 years of austerity. It could go on indefinitely – and pointlessly.
It is this ideological antipathy to the public sector too which is so unbalanced. Though the evidence already shows that for every 2.7 jobs lost in the public sector, only 1 is created in the private sector, nevertheless Osborne is now pressing to cut the public sector workforce of 6 million, not by 400,000 as first planned, but by 710,000. This could well push up unemployment beyond the OBR’s latest upward revision to 2.8 million. Again that will squeeze demand down yet more, further slimming government receipts and requiring higher borrowing.
How long before the bond markets (since he won’t listen to anyone else) tell Osborne his strategy is incoherent and based on a fundamental contradiction?