The MT Diary: Bundred cuts to the truth, and Osborne's doghouse days

Howard Davies on the poisoned chalice awaiting George Osborne in Number Eleven.

by Howard Davies
Last Updated: 31 Aug 2010

Over the summer, battle lines are being drawn up ahead of the election, which must come next May - or earlier, if Peter Mandelson decides Labour will do better if the party fights it with another leader. One presumes he'll tell the prime minister when a vacancy has been created, but you never know.

The Broonites in the Downing Street bunker have evidently decided that the clear blue water they need between Gordon and Dave is on public spending. Labour, they endlessly say, will keep on 'investing'; the Tories will cut, and cut again.

The waters have been muddied, however, by an inconvenient truth - that Labour's own plans already envisage cuts in investment during the next parliament. So Brown's claims sound implausible, and it was hard to find anyone at this year's summer parties who doesn't believe that cuts will be needed as soon as the economy picks up. Not even growth at 0% will be achievable.

My successor (but one) at the Audit Commission, Steve Bundred, did nothing for his honours-list chances with some clear-sighted words on the subject in the Observer. He argued for a public-sector pay freeze, and for including the NHS in any cuts exercise. As Frankie Howerd might have said: Isn't he bold?

But most people think it's only common sense, and that it's a mistake for Cameron to ring-fence such a huge budget. Not everything the NHS does is in the life-and-death category, after all.

So there's an air of unreality about the political debate this summer. Public opinion is way ahead of our leaders, as the BA unions' offer of a pay cut vividly shows. Radio 4's Today Programme interview with the pilots' rep was a gem. The BBC folk simply couldn't believe that he was accepting the need for a pay cut, to save the company. Wouldn't happen in Broadcasting House, of course. The licence fee goes up and up, and it's all theirs, they argue, and ITV and Channel 4 can go hang. (There's a nettle ready for the Tories to grasp, and I suspect they will.)

When challenged on what they would in fact do to put the public finances back on track, our leaders have decided to take refuge in two safe tropes: that they will cut waste, and lay waste to quangos. Hands up those in favour of waste? There, I thought so. And who will defend our quangos? No-one, I see. Even though some of them, such as the Audit Commission, save money by hunting out inefficiencies.

Whenever one hears these two lines trotted out, you know the party concerned has nothing useful to say. If it were so easy to separate the wheat of 'front-line services' from the chaff of 'idle bureaucrats', Lady Thatcher would have done so long ago.

Public-sector systems are a touch more complex than that, and the notion that we can recover from a deficit of over 13% of GDP just by cutting back on paperclips and back-office staff is absurd. There will be a need for real cuts, whether in pay or services or both. So we are sleepwalking towards a cliff edge, led by people who tell us it will all be fine when we wake up.

But will the ambulance of growth come to rescue us, before we crash onto the rocks of austerity? (Easy on the metaphors - Ed.)

There are signs that the economic decline has moderated, partly as a result of what Mervyn King calls 'the Honda effect'. In other words, if you close the plant down for six months and then re-open, it shows up as an increase in output, even if you only build one car a day. And consumer spending has remained reasonably buoyant. I do not find that very reassuring, however. Those of us lucky enough to remain in work have had a cashflow benefit from lower interest rates. Public-sector workers have seen their pay go up, too. As unemployment rises and wage increases stop (or even go into reverse), that impact will be offset.

So I expect no, or very low, growth through the next year, which will be a difficult background against which to begin the process of cutting public expenditure. Still, it will have to be done, and George Osborne will quickly become one of the most unpopular chancellors in living memory - at least, for a while. That is the role history has in store for him, and it's too late now to do anything about it. Sell Osbornes short now is my advice, but be prepared to go long again in 2014, if he has stabilised things by then.

In the meantime, he's enjoying himself, persuasively pinning all our economic ills on Gordon and his hapless, but admirably unflappable, chancellor. Given what awaits him in office, it is hard to begrudge Osborne his fun.

But he may find that commitments to reverse this and abolish that come back to haunt him. By late next year, shifting the desks of banking supervisors will be met by cries of 'It's the budget, stupid', as the rating agency vultures circle the cadaver of our public finances. (That's one metaphor too many. Stop now - Ed)

- Howard Davies is the director of the London School of Economics

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