Undercover Economist

Age comes before austerity

It’s official: George Osborne is Gordon Brown’s mirror-world doppelgänger. Where his forerunner as chancellor offered vast spending sprees, crafted for political effect, Mr Osborne deals out equally vast cuts, with the same close attention to party political advantage. Both use their speeches to play the same old game of three-card monte.

As so often in the Brown era, Mr Osborne left onlookers bewildered as to the details of what just had happened, but quite certain that they had been fleeced. If only the whole performance had been delivered with the speed, panache and dexterity of a market-day conman, we might at least have enjoyed the ride.

Mr Osborne insists that everyone is in this together. Anyone under the age of 65 will beg to differ: every perk and privilege of seniority in British society has been defended. Quite why prosperous pensioners deserve their special treatment is unclear to this economist, but no doubt perfectly obvious to the opinion pollsters.

The effect of changes to taxes and benefits will reduce household income by, on average, 1.5 per cent – but rather splendidly, almost everyone will suffer less than the average. The richest 20 per cent and poorest 10 per cent will pay more. (In cash terms, the rich will pay very much more.) Everyone else will pay less than the average – so much for the squeezed middle.

But the truth is that Mr Osborne’s speech told us little of any importance. Even the long-awaited details of departmental spending budgets tell us less than one might think. As we economists are fond of saying, money is fungible. The Department for International Development’s new focus on “conflict resolution” may take some strain off the Ministry of Defence, while the National Health Service can be handed the bill for social care. The BBC’s budget is being used to cover gaps in the Foreign Office budget – a compromise accepted by BBC management because it was better than propping up the Department for Work and Pensions. That is what fungibility means.

The biggest and boldest of these tricks is the decimation of capital spending . Current spending on schools is to be defended, Mr Osborne boasts. But this means that, while teachers will be paid as before, there will be no money to expand crowded playgrounds or build new classrooms. Slashing capital spending is a way of paying less now and more later – almost exactly like borrowing from the bond markets. Politically, such obfuscation is a smart move. The economic merits are less clear-cut.

The two big questions now are the same as they were before Mr Osborne began speaking: how badly will these cuts damage public services? And how badly will they weaken the economy? Mr Osborne does not know the answer to either question, but gives every indication of having given much more thought to the first than the second.

The economic question is crucial, whether the government knows it or not. It is true the country cannot be kept afloat forever on government borrowing: eventually spending must be cut or taxes raised. The Labour party has never really faced up to this awkward fact, but is right to claim that consolidation will sap the economy’s strength in the short run.

Even if the wildest delusions of the Tory right are realised, and every penny saved comes from the pocket of a benefit cheat or a useless Whitehall pen-pusher, the truth is that benefit cheats and Whitehall pen-pushers spend their income buying goods and services that the rest of us provide.

Mr Osborne is betting that the recovery will not be derailed by his cuts. It is a close call. There is no guarantee that when an established employer leaves town, new businesses will rush in to fill the gap: just ask the citizens of Detroit, Liverpool or Glasgow.

As for public service quality, we can only hope. The last government thought that cash and centralised targets would improve services; the coalition believes in decentralisation and pluralism. That sounds more sensible – as long as nobody utters the words “Big Society” – but, as with New Labour, it is all a matter of faith. And unlike New Labour, the coalition is starting from a wretched financial position. Mr Osborne has flipped his cards deftly, but the long game to come will require more vision – and plenty of luck.

Also published at ft.com.