Tory cuts could be mighty unpleasant

Anthony Hilton
5 Oct 2009

It does not really matter what the Conservatives talk about in Manchester this week because it is almost certain it will not cover the one thing everyone wants to hear about.

They won't talk clearly and openly about what they plan to do about government expenditure nor — just as crucially — when they plan to do it. In this they are at one with Labour.

Everyone agrees that whichever party forms a government next year, it will have to challenge many of the assumptions about the proper role of the state as part of a wider strategy to put the public finances back on an even keel. But both the Labour and Conservative parties think this grown-up topic should not be discussed in front of the children and neither is prepared to spell out what it intends to do in case it costs votes.

However, in spite of the studied vagueness of the leadership it is possible to get some ideas about where the Tories might be headed — largely because those who advise them tend to be more loose-tongued.

And what is particularly illuminating is the interest which George Osborne, shadow Chancellor of the Exchequer, is showing in the 1981 Budget of the then Tory Chancellor Sir Geoffrey Howe — a budget which even almost 30 years later, remains the most controversial of modern times.

This was because it sought savagely to cut the fiscal deficit at a time when the economy was already in recession — by for example doubling the rate of value added tax from 7.5% to 15% — while at the same time running a relatively loose monetary policy.

This move flew directly in the face of economic orthodoxy which holds that during a recession governments should support spending (to avoid making the downturn and unemployment even worse), and then, as the economy recovers, claw the money back.

The Thatcher government went quite the opposite way.

One immediate result was the famous letter to the Times from 365 economists, condemning the policy. The debate still rages today about whether or not they were right.

However, it was politics not economics which drove Lady Thatcher's government. The belief behind the strategy was that high levels of public spending sapped the British economy of its entrepreneurial spirit and therefore, painful though it might be, there was no choice but to wield the axe.

The result was as predicted by the economists — this was the recession which finally did for vast swathes of British manufacturing capacity. Firms went bankrupt across the land and unemployment rose to levels not seen since the Thirties. Out of this wreckage rose an economy driven by financial services. It was this which led many to believe the policy was a success — though they are perhaps less convinced and convincing now.

What is interesting about the Tory party led by David Cameron is not that it shares a similar belief in the need to unshackle the private sector, but that this is combined with a deep-seated antipathy towards the activities of large swathes of public sector employees. There is a venom in the way many talk about it and an ill concealed relish in the idea that it will soon be put to the sword. The NHS is of course off limits, as to a lesser extent is education. But there is nothing short of contempt for almost everything else. It is now seen as a Tory mission to wipe out huge tracts of it. Because they believe that all the money is wasted, most of the employees don't really have proper jobs and very little of value is achieved, the view is taking shape that a Tory government should slash public expenditure by far more than anyone has yet imagined and do so within days of taking office so that the need to do so can be blamed on the mess inherited from Labour.

Whether or not one agrees with the Tory view of the public sector, what no one should be in any doubt about is that should a Cameron government follow in the footsteps of Geoffrey Howe by making a major effort quickly to eliminate the fiscal deficit, the short-term effect would be to make the recession worse.

Readers should also know that it is a gamble because no one can know whether it will work — whether the shock treatment and shrinking of the public sector will in fact re-invigorate the economy.

Another thing readers should remember before they fall too easily into line behind such a strategy is that Margaret Thatcher had two other things going for her which we don't have now. The first and most important of these was North Sea oil, which in the Eighties was just beginning to flow in earnest. It was the tax revenues from this windfall which allowed her to finance so many unemployed. Other oil-rich nations have sovereign wealth funds which they now use to buy assets across the world. We spent ours paying dole money.

The second benefit Thatcher had was a treasure trove of state-owned businesses which could be privatised — British Telecom, Cable and Wireless, British Airways, British Gas — which between them added billions to the Exchequer and again helped pay for the great experiment.

Today there is no family silver left. If the Tories do cut in the depths of recession it could be very unpleasant indeed.