Last updated: June 29, 2013 12:16 am

Osborne opens battle on size of the state

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British Chancellor of the Exchequer George Osborne talks during the launch of the Organisation for Economic Co-operation and Development's (OECD's) latest Economic Survey of the United Kingdom, at the Treasury in central London on February 6, 2013.©AFP

When George Osborne unveiled Wednesday’s spending review he brandished a modern politician’s trustiest shield: a crackdown on benefit claimants.

But although he netted flattering headlines for his determination to cap the growth in welfare spending, the real battle over the scope and generosity of the state is just beginning.

Under current plans, most Whitehall departments face at least another four years of cuts that dwarf anything that has gone before.

Now that all parties have formally embraced post-election austerity, the political conditions – if not necessarily the will – have been created for a debate about what Britons expect from the state and what governments can afford to give them.

Already, almost unnoticed, the character of public expenditure – and thus the nature of the state – has changed hugely over the past 30 years. In 1979, health and social security made up a third of public spending: now they consume closer to a half of this year’s £720bn budget.

Since 2010, however, Mr Osborne has reversed the inexorable rise in the share of national output swallowed by state spending. But the Leviathan has been tethered rather than tamed. By 2017-18, the public expenditure tide will have retreated only to the level it was at in 2004-5.

Paul Johnson, director of the Institute for Fiscal Studies think-tank, said: “To an astonishing degree, over a single generation, the British state has become very much a welfare state and increasingly it’s going to become a welfare state aimed more at the elderly than others.”

The pressures are set to intensify as the very large cohort of postwar “baby boomers” retires. The generation that once “hoped to die before it got old” is succumbing to senescence and we will all be worse off as a result.

The baby boomers were such a big generation that it made it that much easier to pay for [healthcare and pensions] . . . But that postponed the problem that is now going to hit us hard . We’ve had it quite easy for the past 20 years

- Professor John Hills

John Hills, professor of social policy at the London School of Economics and an authority on the welfare state, says: “The baby boomers were such a big generation that it made it that much easier to pay for [healthcare and pensions] . . . But that postponed the problem that is now going to hit us hard. We’ve had it quite easy for the past 20 years.”

Where do the hard choices, for all parties, lie as resources diminish? Mr Osborne’s announcements – including a seven-day wait before benefits can be claimed and tougher “work search” obligations on job seekers – mark a further step towards a US-style system in which the elderly are protected but working age people receive less and less.

However, up to now, it would be difficult to point to a single area from which the state has formally retreated. Even in the realm of university tuition fees, the government continues to play a role through subsidies for low-income students.

Spending cuts and tax rises


Spending cuts have so far taken the strain of deficit reduction: just 15 per cent has come from tax rises. But maintaining the welfare state in the longer term will almost certainly require taxes to do more of the work.


The NHS has been spared from cuts but, with demand rising by 4 per cent annually, patients may have to pay more – either through user charges or higher taxes – if a universal health service is to be sustained.


Retirees have done better than any other group under the coalition. But their protectedstatus looks vulnerable. All main parties have indicated that universal benefits such as the winter fuel allowance may not survive the next parliament.


Working age people have seen their benefits rise by a below-inflation 1 per cent – in contrast to the “triple lock” protection offered to pensioners. This squeeze on working age welfare recipients – even those with children – looks set to continue.

The political argument over funding will be at its most intense over health – by far the most popular part of the welfare state, according to data collected by NatCen social research, an organisation that has tracked public attitudes for three decades.

A number of high-profile figures, including Malcolm Grant, chairman of NHS England, have suggested “co-payment”, where the patient picks up part of the bill, may have to be considered for some services, as the price of maintaining a universal health service.

Some argue that talk of charges is premature when more could be done to reform the way the NHS delivers services and manages its workforce.

The National Audit Office noted in 2012 that the NHS had met its stringent savings target, not by delivering public services in more efficient ways but largely by freezing wages and paying hospitals less.

The most politically perilous option of all may have to be addressed: should taxes be raised to keep us all in the fashion we have become accustomed to over the past 65 years?

Prof Hills warns it will become increasingly hard to accommodate the pressures on schools, health and pensions spending within a fixed total.

“That leaves us with a choice,” he says. “Do we accept these are things we value, we like and we need and somehow or other they are going to cost us more? The most straightforward way of doing that is accepting that in the long run we have to pay higher taxes.”

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