So astute had been the management of expectations in the build-up to yesterday's Comprehensive Spending Review that the immediate response to George Osborne's statement was one of relief, both because the uncertainty was finally over and because it was not quite as savage as feared. The Chancellor had two key tasks: to offer a credible plan to eradicate the deficit by the end of this parliament; and to rebalance the economy to make the public sector more efficient, while optimising the prospects for growth. Broadly, Mr Osborne succeeded in both.
If the cuts were a little less severe than expected, they were still unprecedented in scale. The chief target was the welfare budget and its Byzantine network of means-tested benefits, from which an extra £7 billion a year in savings will have to be found, in addition to the £11 billion already identified in June's emergency Budget. This helps explain Mr Osborne's provocative – and unfair – decision during the Tory party conference to withdraw child benefit from higher-rate taxpayers (which will save £2.5 billion, more than double the Treasury's initial estimate). It gave him the political cover to make real inroads into a welfare budget that Labour, to its shame, allowed to run totally out of control. Significant savings also come from increasing the state pension age to 66 for men and women from 2020, six years earlier than planned. This is the kind of structural reform that has a big long-term impact; expect the age to be raised higher still in the decades ahead.
other significant savings will come from slashing back-office costs and improving efficiency across the state sector. Many chancellors have ventured down this particular road with scant success; we hope Mr Osborne bucks the trend. Local authorities face a particularly tough time, but have been given far greater freedom to prioritise their own needs. The cost in jobs – about 500,000 over four years, according to the Office for Budget Responsibility (OBR) – is high. Yet, as the Chancellor pointed out, with job turnover in the public sector running at about 8 per cent annually, most of those losses should come through natural wastage. More importantly, the OBR also estimates that 1.5 million new jobs will be created by a resurgent private sector over the same period, leaving a net gain of more than one million. That is not fanciful: almost 180,000 new jobs have been created in the past three months, despite the hesitant recovery.
Mr Osborne said that this was the day Britain "stepped back from the brink" as it starts to pay off the bills from a decade of Labour debt. Yet the Chancellor was also conscious of the need to sugar the pill, for confidence is everything and the talk of austerity has been unrelenting and depressing. To this end, he found significant sums to invest in those parts of the economy that will spur economic growth. The science budget was protected, there was a handsome settlement for schools, a record investment in apprenticeships and significant spending on transport infrastructure. In time, more must be done to stimulate a real lift-off in growth, in the form of tax cuts and reductions in business red tape. Nor did Mr Osborne neglect the feelgood factor. Universal benefits for pensioners – free eye tests, prescriptions, bus passes, winter fuel payments, TV licences for the over-75s – are, we believe, hard to defend in these difficult times, yet all emerged unscathed.
Overall, this is an intelligent, businesslike and brave package. It is also a gamble, for no one can be sure it will work. Many voices – most recently that of the Nobel economics laureate Joseph Stiglitz – have been raised in warning that the global recovery is so fragile than a new stimulus is required, not an austerity package. Mr Osborne has defied them, arguing that the later we tackle the deficit, the harder the job will be. We face four tough years; the softer option favoured by Labour offers the prospect of a decade of debt, with the deficit a drag anchor on the economy. The Chancellor has made the right call.
For these cuts may be large, but they are manageable. Companies have gone through similar retrenchment during the recession and come through in good health and with strong balance sheets – often through smart, flexible working and cooperation between management and workers. The public sector should take note. And it is important that the cuts are kept in perspective. We are talking about 500,000 jobs lost over four years in a 30 million-job economy; and £20 billion of cuts a year out of a £1.4 trillion GDP. As the Chancellor pointed out, at the end of this process public spending will be roughly where it was just two years ago. It is important that consumers in particular appreciate this, because their confidence is vital to a sustained recovery.
Other countries, especially the US with its paralysed political system, are looking with envy at what the Coalition is doing and wishing they could take such decisive action. The deficit crisis offers a once-in-a-generation opportunity to reconfigure the economy, shifting the balance away from the overblown and inefficient public sector created by Labour for the most cynical political purposes and towards the wealth-creating sector that is the only guarantee of long-term economic success. Mr Osborne made a good start yesterday – but there remains a very long way to go.