John Lanchester on spending cuts

Spending cuts: The knives are out
In just over two weeks, George Osborne will reveal up to £82bn worth of public spending cuts. Think the Thatcher years were bad? You ain't seen nothing yet, says John Lanchester
John Lanchester The Guardian, Saturday 2 October 2010

If British politics were a musical, that musical would be called Cuts. It would consist of three acts. The theme of Act One was denial. This was the run-up to the election and then the election itself. Alistair Darling's final budget, which set out the goal of halving the deficit by 2014, made it clear that large-scale cuts were coming to the public sector – indeed, cuts of a magnitude this country had never seen. But it gave no detail about what those cuts were going to be, and this blanket denial carried on through the general election, where all three parties seemed to be locked in a tacit agreement not to give any specifics about what they might actually do in office on this, the most important single issue facing the next government. The theme of Act Two was the softening up. Often, in horror films, the single most effective device for building a sense of scariness is the soundtrack: the clanking of chains, the groaning of off-stage ghouls, the unmistakable sound of a cannibal rustic firing up a chainsaw. Act Two was like that, with the coalition making all sorts of dire not-quite-threats about what's going to hit the public sector in the next few years. Public sector workers were invited to wee themselves in fear.

And now, in just over two weeks' time, on 20 October, George Osborne is going to stand up in the House of Commons and announce the results of the comprehensive spending review. That will be Act Three: reality. This is the point at which the cuts stop being a topic of mood music and speculation, and become an economic reality – the dominant economic reality for at least one parliament. There will, I suspect, be a profound shift in mood. I was in Ireland in the summer, talking about the credit crunch at the Galway Festival, and as I spoke I could sense that there was an odd atmosphere in the room. The vibe was different from that in the UK. When it came time for questions, the reason for that became clear: people in Ireland are furious. The mood in that room was dark, and every single question turned on the issue of blame – who to blame, and how much. Ireland is deep into the third act of its own version of Cuts, and the realities have included 20% pay cuts for the entire public sector. The lead story in the newspapers that day concerned the epidemic of recession-related suicides. I don't know if our third act will take us to the same place, but it will certainly take us in the same direction.

Given this, the first and simplest question people ask is whether any of this is necessary. The short answer, from pretty much every economically literate person in the world, is yes. In the years building up to the crash, the government had accumulated a structural deficit, in other words a permanent gap, every year, between the money it was raising in tax and the money it was spending. (A word about the distinction between deficit and debt. The best description of a deficit is the one given by Dickens's character Mr Micawber: "Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." When your annual income is less than your expenditure, you have an annual deficit. Some commentators on the right have argued that the word deficit should be replaced by the more politically charged word "overspend". In Micawber's example, the deficit is sixpence; in the case of the UK, it is £159.2bn – but the principle is the same. As for the debt, it's nothing more than the sum total of all the deficits accumulated over time.) The structural gap was going to have to be fixed at some point. It was as if the government had gradually and steadily dug a hole that would one day, for sure, need filling. The ideal thing would have been for the government to allow the economy to grow without taking a bigger proportion of it, so the proportion of public spending would gradually, and as it were naturally, shrink. Instead, what happened was the credit crunch, causing a brutal contraction in the economy of 6.9%, the worst and longest decline since the great crash of the 1930s. In other words, having slowly dug itself down to the bottom of a hole, the entire economy then fell into a crevasse.

The upshot of that is that the government's finances did the splits: the tax take collapsed just as welfare spending shot upwards. This meant that instead of a gradual rebalancing, the government is having to institute a difficult process of cutting to restore the public finances. In the shorter term, however, the people who had to be placated were the international debt markets. If a government needs to borrow £150bn to meet this year's bills – which our government does – then it has to look like the kind of government that is going to take the repayment of its debts and the value of its currency super-seriously. If it doesn't, then lenders will be reluctant to lend to it and will express their reluctance in the traditional market manner by charging it more to borrow money. That can easily lead to a kind of death spiral, in which the government is borrowing more and more to pay back money it has expensively borrowed. It is to avoid this spiral that all the parties were talking the language of cuts – so far, it has to be said, successfully, since the government's cost of borrowing has not gone up. (We'll never know if that would have been the same in the event of a Labour victory.)

The necessity for at least some cuts is increased by the fact that the costs of administering the welfare state, especially health and pensions, are set to rise extremely sharply in the decades ahead. We are getting older: the average age of Britons is 39.9, the highest it has ever been, and it is set to rise. When Beveridge brought in the state pension, kicking in for men at the age of 65, the male life expectancy was 64. In other words, the average man died before he could claim any state pension at all. Now his life expectancy at birth is 77.4, and his life expectancy at retirement age is 82.4. That's fantastic, an achievement this country should be very proud of, but when it comes to planning our welfare state, it does wreak havoc with the numbers. This is a question that transcends party politics, and needs addressing.

The new coalition government's way of dealing with this was initially surprising. They basically said, "Aaarggh! You're all going to die!" They announced cuts of 25% in all "unprotected" departments – ie all departments other than health and overseas aid. Unprotected departments were told to prepare cuts all the way up to a "worst-case" level of 40%. What does that mean? Well, as Rowena Crawford of the Institute for Fiscal Studies pointed out some time ago, "For the ministry of defence, an 18% cut means something on the scale of no longer employing the army." No spending at all on roads, and closing the majority of courts – that's the kind of thing we were being asked to envisage. Cuts at these levels are unprecedented and far, far exceed anything Margaret Thatcher achieved. Labour had already announced £52bn of cuts to come by 2013-14; the new coalition added another £30bn on top. No government has ever achieved anything like that reduction in public spending. To put it in perspective, since 1950 there have been only two periods during which public spending was cut for two years in a row. The coalition is proposing to cut it for six consecutive years. This, it seems to me, beggars belief, and I at first struggled to understand why any government would so publicly set out to do something so plainly impossible. The stated target of shrinking the state below 40% of GDP is yet another point on which the coalition is planning to go far beyond the Thatcher government. Why? Who voted for that?

The explanation, I think, is that the coalition – which, in practice, in this instance, means the Tory party – is attempting to create what political wonks call an "inflection point". They want to make a fundamental change of direction in British politics. There have been two of these in the last decades, the first of them Thatcher's election in 1979 and the second Tony Blair's in 1997. The election of 2010 wasn't an inflection point, not least because it didn't produce a majority government. So the Tories put into effect what was obviously a plan to create their own inflection point through Osborne's emergency budget. The idea, I think, is to change the British political ecology. Public sector workers, in particular, are supposed to be scared into malleability. The idea is that instead of being grumpy that some of them have lost their jobs, everybody who is still in work will instead be grateful, relieved and suitably cowed. It will be a change in direction for the British state, and will give a clear way forward for the Conservative party as it returns to its traditional identity as the party of the smaller state. "If they can't do it now," a Tory friend told me, "when can they do it?" In other words, there will never be a more opportune moment for the party to set out its stall to cut spending. Hence the tearing-off-the-arm eagerness to seize the opportunity.

So the politics of this makes a depressing kind of sense, from a rightwing perspective. What is much less clear is whether the economics of the cutting makes as much sense. Cuts were coming whoever won the election, and the £52bn of Labour cuts would have been agonisingly painful. During the contest to be leader of the Labour party, Ed Balls became the first senior Labour figure to say that he thought the cuts implicit in Labour's plans went too far – and that is certainly a valid point of view. Balls' argument is that the cuts make it harder for the economy to begin growing its way out of recession. The coalition's extra cuts seem to raise that possibility to dangerously high levels. Neutral observers do agree that some cuts are needed, but they increasingly don't agree about the level of them. Bear in mind that at the June meeting in Canada of the G20 – that's the world's 20 biggest economies – a general commitment was made to halve all deficits by 2013, and to "stabilise" debt by 2016. That means that every government in the world is simultaneously trying to tighten their belts. So where is the demand going to come from to restart growth in these big economies? If everyone is cutting up their credit cards, where will growth come from? It's supposed to be a "production-led" recovery, not like the consumer-led boom we've just lived through. Fair enough, as an idea, but production-led recoveries still need someone to buy the stuff you produce. In this vision of a global war on debt and deficit, it's not clear who the prospective buyers are.

Some observers have said that the prospect of a global austerity drive reminds them of the mistakes that turned the great crash of 1929 into the Great Depression of the 1930s. Governments, instead of stimulating their economies with spending designed to create employment – the policies advocated by Keynes – instead tried to belt-tighten their way out of trouble by behaving as if they were households with a cash flow problem. But the analogy between household and whole economies is imperfect, as subsequent events clearly showed. A coordinated global slowdown in government spending might turn out to be exactly the last thing we all need.

Put all this together, and the unfortunate fact is becoming unmissably clear: the consequences of the credit crunch are going to fall far more heavily on the innocent than on the guilty. A lot of people who did nothing wrong and who are entirely blameless in the credit crunch are going to lose their jobs. The current estimate for public sector job losses to come is 600,000, in addition to the 750,000 (mainly) private sector workers who have lost their jobs already. "Tell us what we did wrong" – I heard the wife of a laid-off firefighter asking that question, and not getting an answer. She is not going to be the last person to ask it. Research is already showing that the people disproportionately targeted by the cuts will be the poor, especially poor women. As this fact becomes not an idea but a reality – as we move into Act Three – it seems highly likely that the basic unfairness of this is going to become more and more evident, and more and more rankling. For the bankers, business is more or less back to usual; in fact, for the remaining banks, business is as good as it has ever been. Since the public sees the bankers as being the people responsible for the credit crunch, and since the credit crunch caused the recession that in turn caused the cuts, there is a brutal contrast here: the guilty parties doing better than ever, the innocent taking all the pain. Again: did anyone vote for that? Does anyone think it is the kind of society we want to be?

A strongly negative trend in British life over the last 30 years, and one that unfortunately continued during Labour's tenure in office, was the increasingly sharp division between winners and losers. That tendency is set to become even more marked. We are heading back to the bitterly divided politics of the late 1970s and early 1980s, except with our newly sky-rocketed levels of inequality. So 20 October is going to be a hugely important day for Britain. I have in the past predicted anger, as the consequences of the recession for public spending become clear; I think the process of expressing that anger has barely begun. What that will do to the coalition is anybody's guess. As anyone in showbusiness will tell you, many a promising production has collapsed horribly in the third act.