Limited success for Osborne’s ‘lawnmower’ cuts

Most people who have had to adjust their spending behaviour after a substantial loss of income probably observed two things. Firstly, the ‘lawnmower method’ – cutting expenditure across the board, without any individual cut being drastic on its own – will only spread the pain to a lot of areas without making enough of a difference overall. Instead, one needs to identify several items of expenditure which are dispensable altogether, and remove them in their entirety. Cancelling an underused subscription or club membership is probably a good idea. Eating a bit less of everything is probably not.

Secondly, cutting out budgetary items but otherwise carrying on as before will also produce unnecessary pain for little gain. One needs to combine spending cuts with wider behavioural changes that make high expenses less necessary. Moving to a smaller home which requires lower heating expenses is probably a good idea. Staying in the old home, turning down the heating, and sitting in the cold, is probably not. In short, budget cuts have to be strategic, and integrated into broader structural changes.

The same logic applies to the fiscal realm. Chancellor George Osborne’s approach has some strategic elements and recognisable priorities, but too much of it follows the lawnmower method. This has been apparent since the 2010 Comprehensive Spending Review and the 2010 Budget, which mostly consisted of random cuts. Some benefit rates were temporarily frozen, others were abraded in real terms through changes in the uprating formula, and many items had their edges trimmed. Wednesday’s spending round did not break out of this rut.

The cancellation of winter fuel payments for pensioners who live abroad in a warm climate is a good example. This is an age-related, but otherwise unconditional benefit, not related to a recipient’s prior national insurance contributions or need. It would have been more expedient to go back to first principles, and ask what a pension system is actually there for. For the vast majority, the pension system should enable an old-age living standard proportional to the contribution payments they made, or alternatively the savings they accumulated, during their working lives. For the unfortunate few who were neither able to build up contributory entitlements nor assets, it should provide a decent minimum level.

The former objective requires a contributory or a savings-based pillar. The latter objective requires a means-tested safety net. But neither objective requires universal cash benefits such as winter fuel payment, nor universal benefits in kind, such as free bus passes and free television licenses. These benefits should have been rolled into the means-tested safety net, and thus removed from better-off pensioners.

Osborne also boasted about the government’s commitment to invest over £3 billion in affordable housing. This is nothing to boast about. It would have been more sensible to ask why such an investment is deemed necessary in the first place, given that housing is scarcely a core function of government. The reason is that private housing development in the United Kingdom is hampered by an ultra-restrictive planning system, which gives far too much power to ‘nimbys’, and none to those who try to get a foot on the housing ladder.

The economically straightforward – though politically contentious – solution would be to allow private developers to respond to demand, and build lots of new homes. This would drive down house prices and rents, which would save the exchequer vast amounts in housing benefit, social housing, and support for mortgage interest payments. The more affordable housing is, the smaller the number of people who need government support with housing costs.

Osborne proudly declared that ‘this country is already spending more on renewables than ever before’, as if that was a good thing. Subsidies for renewable energies are a wasteful fad. They are hard to justify at the best of times, but in a fiscal crisis they should have been among the first items to go. If the government’s aim is to reduce CO2 emissions, the least damaging way to achieve this is a source-neutral carbon tax. Such a tax would incentivise households and businesses to work out the carbon abatement strategies that hurt them least, which will differ from case to case. But building an illusory ‘green economy’ is a rehash of 1970s-style industrial policies of picking winners.

Speaking of winner-picking, the High Speed 2 rail project should have been cancelled no less. If it is such a terrific investment as the government claims it is, it should be easy to find a private investor who is willing to incur the risk on an unsubsidised basis. Since no such investor can be found, HS2 fails the market test. If the government wants to promote infrastructure projects, it should clear the way for privately funded toll roads and airport expansions.

After Barack Obama had mistakenly addressed George Osborne as ‘Jeffrey’ at the G8 summit, several commentators have likened the chancellor to Joffrey Baratheon, the villain-king of the Game of Thrones series. But that comparison fails. Joffrey pursues the wrong ends, but at least, he reaches all of them so far. A more fitting figure for comparison would be Eddark Stark. Stark broadly wants to do the right thing, but he goes about it devoid of any strategy, and refuses to adopt one when things get critical. Let us hope that this is where the parallels end.

This article was originally published by Public Service Europe.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).