Turning thought into action is never easy. Finding an extra £20 billion in public sector savings, as George Osborne must over the next four weeks, is going to be exceptionally hard. He has allowed too much government spending to be ring-fenced. He is under intense pressure to revisit his decision to cut tax credits for the working poor. He has barred himself from borrowing “in normal times” and his prime minister has barred him from cutting the biggest single component of government largesse, which goes to pensioners. Something big will have to give.
Mr Osborne has promised to deliver a budget surplus by 2019-20. This is the reason for the looming cuts, and they are more than justified. The economy is too vulnerable to inevitable interest rate rises and, when they come, vital investment in skills and infrastructure will be hostage to the rising cost of servicing the national debt and deficit. The challenge for the Treasury, however, is to find these savings without imposing unsustainable burdens on those least able to shoulder them. So far this challenge is not being met.
Before the election the coalition enshrined in law a commitment to spending 0.7 per cent of GDP on overseas aid. Since then the Tories have promised to spend 2 per cent of GDP on defence. They have also put spending on health and education beyond the reach of the austerity knife, and their manifesto undertook to protect a range of pensioners’ benefits and the “triple lock” on the basic state pension.
These promises have drastically narrowed the chancellor’s options. They have ensured that future cuts will fall disproportionately on in-work benefits and unprotected departmental spending, and they may narrow still further. Publication of the government’s detailed spending review is due on November 25. As it approaches, Mr Osborne is said to be receptive to arguments from both the Home Office and the Foreign and Commonwealth Office that excessive cuts to their budgets would put national security at risk.
Hence the sensitivity of the £4.4 billion in savings that Mr Osborne hopes to make by cutting tax credits. The broad justification for these cuts has been that those affected would be compensated in the long run by the introduction of the living wage, which the Treasury projects will start at £7.20 an hour and rise to £9 by 2020.
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In reality the overlap between those who gain from the living wage and those who lose from the tax credit cuts will be small. The Institute for Fiscal Studies (IFS) estimates that three million families could be worse off by an average of £1,000 a year once the cuts are introduced in April.
Many of these families live in marginal Tory seats, which is why a rebellion is brewing on the Conservative backbenches. If there were no other way of finding these savings, Mr Osborne and the prime minister might be justified in facing down the rebels. But their position is based on the premise that the special favours granted by the government to the elderly are sacrosanct, and they should not be.
In a lecture last night Paul Johnson, the director of the IFS, presented research to show that Britain’s pensioners are better off than ever; that for the first time their incomes are on average higher than those of working people; and that young working people are helping to shoulder the cost of defined benefit pensions for some of today’s retirees from which they themselves will never benefit.
It is reasonable to cut tax credits even at the risk of a temporary loss of income for some people, but not if these are the very people being forced to underwrite the most affluent generation of pensioners in British history. Benefits for the elderly are important, but not sacred. Mr Osborne may yet have to go to them cap in hand to keep his long-term economic plan on track.