UK spending cuts risk turning into demolition job

The British government may find it hard to stick to a coherent strategy as ministries scramble to cut spending by up to 40 percent on Treasury orders.

Prime Minister David Cameron, who took office in May, says shrinking the record peacetime deficit from 11 percent of GDP to almost nothing within five years is the most urgent task for his Conservative-Liberal Democrat coalition government.

A spending review is under way and results will be announced on October 20. Cameron has likened the process to “the methodical turnaround of a failing business”, but there are many sceptics.

“Ministers are effectively flying blind, under orders to cut programmes by up to 40 percent but with confused guidance about their departments’ objectives,” said a recent report from the Centre for Social Justice (CSJ), a Conservative think tank.

Many fear that cuts will be made based on what is expedient for politicians or least difficult for civil servants to deliver, to the detriment of social and economic goals.

“At the moment there is not the sort of coordinated response needed across departments to deliver the government’s economic objectives,” Adrian Bailey, opposition legislator and chair of a parliamentary committee on business, told the Financial Times.

Alastair Newton, political analyst at Nomura, said the test would be whether the government scrapped low-priority programmes to ensure proper funding for high-priority ones, or whether it merely “salami-sliced” money from many programmes.

“I’m cautiously optimistic that we’re going to get some sensible prioritisation simply because the scale of the cuts is so big that you cannot salami-slice your way through,” he said.

Newton said the coalition appeared to be looking seriously for areas from which the public sector could pull back, but it would be hard for centre-right Conservatives to agree on that with their junior, centre-left Liberal Democrat partners.

“There is no such thing as the right solution here. There’s what they can get away with,” he said.

Sledgehammer
There are no obvious templates for what the government wants to do. The scale of the cuts dwarfs Britain’s two most recent austerity drives, after a 1976 IMF bailout and in the 1980s, under the leadership of then Prime Minister Margaret Thatcher.

There are also big differences with the much-admired Swedish and Canadian efforts in the 1990s. Britain is launching into these cuts at a time when growth in some of its key trading partners is weak and interest rates are at record lows, leaving little leeway for rate cuts to support growth.

The government has ring-fenced health, a move popular with voters which leaves one of the biggest items of public spending beyond the reach of the cuts, exposing other areas even more.

“Speculation will continue to mount about whether that ring fence can be maintained if it turns out to be politically challenging to make deep cuts in other sensitive areas,” said Sam Hill, fixed income strategist at Royal Bank of Canada.

Another concern is that cost-cutting in one area, such as layoffs or early retirement for public sector workers, could lead to extra spending in another, such as welfare bills.

Russell Jones, global head of fixed income strategy at Westpac, said the Treasury appeared to be “playing hardball” to push ministries to deliver wide-ranging cuts.

“This is not a subtle policy at the moment, it is a sledgehammer. The danger is it hurts the economy’s flexibility and underlying dynamism over the longer term,” he said.

The government is adamant that will not happen. Cameron has said that “governing for the long term” was a guiding principle of the spending review and tough decisions would be made.

“The truth is there will be some things that we genuinely value that will have to go,” he said in a recent column.

But early initiatives to cut spending have given a flavour of the difficulties ahead for the government.

In an embarrassing moment recently, Cameron’s office ruled out a proposal to scrap free milk for schoolchildren, deemed too politically toxic, at the very moment when a minister was busy defending the idea on live national television.