Spending cuts: 'a dreadful day for British people'
Updated on 24 May 2010
David "Danny" Blanchflower, former monetary policy committee member and economics professor at Dartmouth College, gives his verdict on today's spending cuts.
This morning 'Slasher Osborne' announced the reckless spending cuts he had always threatened.
The actual number of £6.2bn was slightly larger than he had pre-announced during the election campaign. In my view these cuts will be a disaster for ordinary working people who will see their living standards fall and unemployment rise.
I expect unemployment to increase to well over three million by the end of the year and youth unemployment to be above a million, unless the government reverses course immediately.
At the press conference the Chancellor argued that these cuts are intended "to boost confidence in the economy and protect jobs". Far from it they will likely destroy jobs and cause confidence to collapse.
This on the day that a survey of British households showed that they are more pessimistic on their finances than they have been in more than a year in May amid worries the government's planned austerity measures may hurt their prospects, Markit Economics reported.
Other related stories
Spending cuts: where the £6bn axe will fall
Job losses 'inevitable' over spending cuts
Treasury's 'shockwaves' as £6bn cuts revealed
Gary Gibbon: how easy is it to make efficiency cuts?
Faisal Islam: 'kind cuts' do not mean painless cuts
About 57 per cent said public spending cuts would hurt them. Commenting on the figures Andrew Self, an economist at Markit said that "the May survey showed the reality of impending government spending cuts biting, with job security and the outlook for household finances among public sector workers slumping to the lowest seen since the depth of the recession."
The savings are due to be made from the budgets of 2010-2011 which have largely been determined already. Contracts have been signed and it is very unlikely that significant savings can be made from waste and efficiency this year.
Either there will be few savings or there will be savings from firing people, self-employed consultants are going to be hard hit. A hiring freeze will hit the young very hard at a time when youth unemployment remains high. A pay freeze in the public sector will lower demand further and inevitably lower growth.
Gerry Grimstone, adviser to the Treasury and chairman of Standard Life, writing in the Financial Times on 8 April 2010, had it right when he argued:
"This financial year has already started. The economy is in a fragile state. Incoherent attempts to deliver efficiencies will not deliver value for money and will damage the services people rely on in times such as these."
GDP dropped by over 6 per cent from peak to trough and we have had two quarters of weak growth. The latest quarter looks like it will be revised up a little, but this does not imply that all is well. There is little evidence that firms are investing or hiring.
As James Galbraith recently argued in the Nation, economic growth can be obtained either through government spend or bank lend. At the present time there is very little bank lend, hence the need for public spending. Without it we risk a double dip recession or worse still a Great Depression Mark 2.
These cuts are driven by dogma not by sound economics.
First, over the last few days the size of the public deficit was revised down by over 7 billion, removing the need for these cuts.
Second, growth in the euro area will likely be revised down because of the spreading sovereign debt crisis. The failure of the Spanish bank CajaSur over the weekend spread fears through the markets that the current crisis has legs and is far from over.
The EU is our major trading partner and lower growth there means lower exports and lower growth for the UK.
Third, these cuts in themselves will lower growth further and are not included in either the Treasury or the MPC's bullish growth forecasts.
The size of the cuts are not trivial, as some have claimed, because of the scale of the multiplier effects involved. They will harm workers in the public sector and the private sector and lower incomes and profits.
In any case if they are trivial why do them at all?
The majority of the British electorate did not vote for these cuts in the election just two weeks ago.
And there are apparently many more cuts to come. Osborne has no mandate for these cuts.
This is a dreadful day for the British people.
David 'Danny' Blanchflower is Professor of Economics at Dartmouth College, New Hampshire and the University of Stirling. He is a columnist at the New Statesman and Bloomberg