Leaders | Public spending in Britain

U-turns and new turns

Despite his retreats this week, George Osborne is remaking the British state

IF THE spending plans for Britain over the next five years, set out by George Osborne this week, were an animal, they would be a pushmi-pullyu. With one half, the chancellor was utterly opportunist—reversing tax-credit cuts which had caused uproar for hitting the working poor, and shying away from a politically awkward trimming of the budget of the police soon after terrorist attacks in France. With the other, he was a determined reformer, continuing work on the most ambitious redesign of government since Margaret Thatcher. Inevitably, the U-turns captured the headlines. But it is the remaking of the state that matters more.

Speak their language

Mr Osborne is a lucky man. Because tax receipts between now and 2020 are likely to be higher than expected (and interest payments lower), he had £27 billion ($41 billion) more to spend than he thought only four months ago. He raised the same amount again, and a little bit more, through tax rises, including a levy to fund apprenticeships. He has used this extra money to cut spending more slowly than he had threatened and, in some cases, to spare the knife altogether.

The chancellor was wise to scrap his plans to slash tax credits, a top-up to earned income pioneered by the previous Labour government. The planned cuts were highly regressive and they threatened to penalise extra earnings so heavily that they would have blunted the incentive to work. Best to swallow his pride and ditch a wrong-headed reform (though other changes to welfare will gradually replace tax credits with a benefit that is also less generous). His U-turn on the police also scored a rousing cheer in the House of Commons on the day—Tories instinctively back the men and women in blue. Here, however, Mr Osborne was not so clever. By giving in to one of Britain’s fiercest public-sector interests, he has suggested to all the others that they might see him off if they put up a decent fight. For the sake of a headline, he has made his job harder.

All in all, the pushmi half of Mr Osborne will spend £18.5 billion of his extra money. But don’t forget the pullyu. On entering office in 2010, the chancellor faced a deficit equivalent to 11.1% of GDP. Despite this week’s U-turns, he still plans to end this parliamentary term, in 2020, with the government in surplus. Spending is to fall from 45% of GDP in 2010 to 36% in 2020. At the same time the chancellor wants to devolve fiscal and spending power away from Westminster.

Change on such a scale will lead to a fundamentally different sort of state. The past five years have shown that government departments can be cut without wrecking the things they provide. Despite dire warnings from public-sector unions, voters’ satisfaction with services has held up. Mr Osborne deserves credit for this, but he is taking a gamble with the changes still to come. By 2020 departments will be too cash-strapped to run things; public administration will be far more about awarding and overseeing contracts. That is a sensible shift, but it is not clear that bureaucrats are up to the job.

Worse, Mr Osborne has also made three mistakes. The first is that he remains wedded to the arbitrary—and political—goal of an overall surplus (including investment) by the end of this parliament. As a result, Britain has, and will continue to have, an unnecessary shortfall in capital spending on infrastructure. That is a source of inefficiency and, hence, low productivity.

The second is that the cuts have fallen unevenly. Health care, schools, defence and foreign aid have been protected, while other departments absorb the pain. The squeeze on many departments is intense. Some have responded by raising money in worse ways than taxation: the cash-strapped Ministry of Justice is making convicts pay to use courts, while the Home Office is levying absurdly high fees for visas. Redesigning the state in such a lopsided way defies logic.

The third, related point is that Mr Osborne’s allocation of resources has been dictated by politics. The elderly, who vote and therefore have a special place in politicians’ hearts, received another above-inflation rise in their pensions this week, even as it was confirmed that poor students’ grants would become loans. Pensions are protected by a “triple lock”, which guarantees that they will rise by the growth in earnings, inflation or 2.5%, whichever is highest. Homeowners got a bigger giveaway in the form of interest-free mortgages on newly built London homes for first-time buyers, a recipe for even higher prices and rents (see article).

If Mr Osborne’s reforms are to produce the smaller, leaner, state he seeks, these flaws need to be addressed. The visionary will have to triumph over the political operator. That would both go against his style as chancellor and demand great political courage. It seems unlikely, but unless Mr Osborne can steel himself, his revolution will be only half done.

This article appeared in the Leaders section of the print edition under the headline "U-turns and new turns"

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