June 3, 2013 7:18 pm

British politics catches up with the age of austerity

Parties will be confronted with hard choices about the role of the state

A government struggling to move a torpid economy and an obstinate fiscal deficit would usually, sheepishly, find something else to talk about. But, as voters still trust the Labour opposition even less on economics, the Conservatives are impatient to press their advantage this summer. Prodded by his advisers, David Cameron, the prime minister, is contemplating a speech on the subject. But for last month’s terrorist attack in London, it might now be imminent.

And, despite the knotty work of agreeing departmental budgets, George Osborne, his chancellor of the exchequer, senses an opportunity as well as a burden in the spending review on June 26. He will set out fiscal plans for the first year of the next parliament and invite Labour, still living down past profligacy, to match them. The opposition’s newly frugal noises show they respect the political gravity of the occasion. Ed Balls, the shadow chancellor, acknowledged on Monday that a future Labour government must contend with “falling departmental spending”; and Ed Miliband, party leader, will harden his line on benefits on Thursday.

But the economic significance of the spending review does not nearly equal its political import. It aims to save more than £11bn but the deficit is 10 times that sum. It deals with only one side of fiscal consolidation. The deficit is being closed through tax rises, too. And where spending reviews have typically covered several years, this one is confined by the exigencies of coalition to a single year. The Liberal Democrats, who govern with the Tories but refuse to bind their options beyond the next election, are only putting their name to plans for 2015-16 because it includes the last months of this parliament. Danny Alexander is the quiet colossus of this government, but the hawkish chief secretary to the Treasury – who impresses Tories with his toughness and political nous in meetings – is not typical of his fellow Lib Dems.

More than all this, entire limbs of Leviathan are off-limits as the government scours for savings. Healthcare, which accounts for almost £100bn of annual spending, is ringfenced, as is foreign aid. Pensioner benefits such as free television licences and winter fuel payments are also privileged, while schools have been partially shielded. So this is not really a “review” of spending in any fundamental sense. And it is all because of political promises made at the giddy peak of the boom or its aftermath, when it seemed growth and balanced budgets would return as a matter of course.

Both main parties were complicit in the années folles: Labour spent voluminously and created entitlements, and the Tories went along with most of this. The nadir was Mr Cameron’s straight-to-camera pledge in the televised debates before the last election to protect pensioner goodies. The electoral logic was impeccable. It also served a harsh-seeming Tory party to make sacred cows of public services and aid. But such promises have hamstrung austerity, preventing the entire political class rethinking from first principles what the overextended state should be doing. They have also forced other departments, especially defence, to endure cuts that are starting to test the outer limits of sound government.

It is unimaginable that this situation will endure into the next parliament, whoever governs. Eliminating the deficit will require substantial cuts beyond 2016, and these will be hard to make without tearing down ring fences built in an era that will by then seem as decadent and alien as the roaring 1920s of the The Great Gatsby. Mr Balls’s new plan to end the winter fuel payment as a universal benefit deserves to be the first blaze in a bonfire of fiscal inanities. The Tories and Lib Dems must respond with similar announcements.

If all three parties go into the next election agreeing there can be no untouchable areas of spending, the political venom usually found in this debate will vaporise. The next parliament can then begin with a proper “zero-based” spending review of the kind Mr Balls has talked about in the past. Britain can finally have a strategic conversation about what government is for, one that would aim not just to see off the current deficit but also to prevent a fiscal crisis happening again. It would broach the question of whether departments such as the culture ministry deserve to exist. It might conclude the test for spending is not whether it serves social justice but whether it promotes growth: health and aid would have to compete more intensely for funds against universities and promising sectors of the economy. Historians might come to the view that the age of austerity began in 2010 but only really became rational in 2016.

Labour has shown flashes of prudence before. Mr Miliband began 2012 with a speech similar in its grudging realism to Mr Balls’s this week. But the party soon relapsed into its comfort zone. If it is serious about using the spending review to polish its fiscal credentials, the dilemma is for the Tories. They can dismiss Labour’s announcements as small bore and insincere, or they can claim intellectual vindication and use the political freedom to erase red lines drawn quixotically around certain budgets in the past. The high road is there for the taking.

janan.ganesh@ft.com

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