Britain’s next general election is not due for another year and a half, but George Osborne is already on manoeuvres, busily drawing up dividing lines between the ruling Conservatives and the other political parties.
In his first speech of 2014, the chancellor insisted that, if the Tories are re-elected, they will reduce public spending further, including £12bn in further cuts to the welfare budget. Provided that growth does not disappoint, these savings would ensure that Britain ran a budget surplus by 2018-19. The chancellor would then make good on his aspiration – announced last September – that a Tory administration would bring the public accounts back into the black by the end of this decade.
The political calculations behind Mr Osborne’s pledges are not hard to discern. He wants to outmanoeuvre Labour as well as his coalition partners, the Liberal Democrats. Mr Osborne hopes that his opposite number, Ed Balls, will not match the commitment to balance the books as quickly. This would leave the shadow chancellor open to the accusation of being a reckless spender. And while the Lib Dems are eyeing a budget surplus before the end of the decade, they want to get there by raising taxes as well as cutting spending. Nick Clegg, deputy prime minister, immediately attacked the Tories’ proposals as “unfair”.
It may make political sense for the chancellor to frame the debate around the management of the economy, where polls show the Conservatives are stronger. By advocating steeper cuts to the welfare budget, he is also striking a chord with the electorate which has become increasingly impatient with the cost of Britain’s safety net.
However, the economic logic underpinning this plan is less compelling. Take, for example, the promise to bring the public accounts into the black by 2020. Since the UK still borrows more than £100bn a year, continuing to reduce the deficit is a sensible direction of travel. A budget surplus would help to cut Britain’s large national debt, allowing the government to spend less on interest payments. However, it would be wrong to fetishise this target if the economy disappointed. The chancellor would then need to wield his axe more brutally, damaging growth.
Mr Osborne’s view that a significant proportion of future savings should come from the welfare budget is also contentious. The main problem here is that the Conservatives are mainly targeting working-age benefits. True, there is no formal commitment to preserve the ringfence the coalition has erected around the free perks enjoyed by the elderly regardless of their income – for example the winter fuel allowance. On Sunday, however, David Cameron, prime minister, pledged to protect the “triple lock” on state pensions. Under a Tory administration, these would rise by at least 2.5 per cent a year until 2020.
This leaves Mr Osborne with only about half of the £200bn welfare budget to cut from. Squeezing a further £12bn from this will not be easy. More sensible – and generationally equitable – would be to spread the pain across all benefits, including pensions. There is also a case for reviewing some departmental spending. The pledge to ringfence some departments – for example health and international development – looks increasingly anomalous.
Throughout this parliament, Mr Osborne has been caricatured as a stubborn and ideologically driven politician. In reality, he has displayed considerable flexibility, allowing his deficit targets to slip when pursuing them would have posed too big a risk to demand. As he prepares the ground for the next election, Mr Osborne should not abandon his pragmatism. The economic outlook is still too uncertain to make commitments that could prove impossible to deliver.