Approval for cuts now, but beware the brickbats later

First published in the Telegraph on 22 June 2010

ONE of the perks of being Chancellor is that, alone among ministers, you are entitled to take a dram of whisky into the Commons with you to sip while you deliver your big set piece.

For once, this is a tradition with some rationale behind it. Few Parliamentary appearances are as intimidating as the Budget. If the pre-match hype is to be believed, George Osborne’s task is particularly terrifying – perhaps the toughest Budget appearance in modern history.

Is this accurate? Certainly by some measures the task is incomparably brutal. No incoming government has ever had to deal with a budget deficit as swollen as it currently is. No Chancellor has had to wrestle with the consequences of such a significant financial crisis (well, apart from Alistair Darling), nor take possession of so many banks. No government has had to impose the kind of austerity the Government has signalled – at least since comparable records began in 1948.

So it is little surprise that Osborne has spent some of his time since taking office consulting his predecessors on their toughest days at the Dispatch Box. Early on he invited Ken Clarke and Lords Howe, Lawson and Lamont to 11 Downing Street to run through their Budgets-from-Hell. They had quite a few to compare. There was 1979, when Geoffrey Howe had to call an emergency Budget within 40 days of the election to make a first step towards cleaning up the mess of stagflation and the 1970s International Monetary Fund bail-out. There was the Budget two years later when he raised taxes against the advice of almost the entire economic establishment.

There were the later disaster-limitation Budgets for which the Tories really had no excuses: Lamont setpieces following the Black Wednesday disaster and the Lawson-fuelled housing market crash, the spending cuts Clarke had to impose on an unhappy population in the 1990s. But one message was clear: Osborne should not expect to change everything overnight. The seminal Budgets upon which the Chancellors dwelt longest in their discussions did not come immediately after an election.

Howe’s 1979 Budget and his effort the following year were not great successes: although they were instantly more credible than the Labour statements previously, they failed to stop the rot entirely. Borrowing still came in above target for the next two years, and it wasn’t until his 1981 Budget, which raised taxes and cut spending in the middle of a recession, that the Thatcher government started gradually to impose its control on the economy and whittle down the size of the state. The other main Budget under discussion was Lawson’s in 1988, in which he slashed taxes and trimmed public spending yet further. The point was that after many years of hard work and deep austerity cuts, the Chancellor could finally mould the kind of tax system he wanted.

All very instructive, but if Osborne is looking for lessons from history, he would probably do better looking back further. Perhaps the best parallel for the scale of cuts the Chancellor needs to impose is not the 1980s or 1990s (cuts in expenditure of 3.3pc and 2.8pc respectively) but the 1920s and 1930s. In 1921, Lloyd George set up a committee of business experts, led by Sir Eric Geddes, to review Government spending. It managed to cut spending by a momentous 11.4pc – although some of this was thanks to post-war demobilisation, and the austerity was so severe it led eventually to the General Strike later that decade.

Indeed, insiders say that Osborne’s independent Office for Budget Responsibility owes much to the model of the Geddes Committee. The cuts in the 1930s were less severe (5.8pc) but, just as the threat today is an exodus of foreign investors from UK gilts, those cuts were partly triggered by JP Morgan’s refusal to lend to the UK government unless it put its books back in order.

The lesson from those episodes: that however many people agree that cuts are necessary, people will eventually become extremely angry with the Government all the same. It is something Osborne should ponder. Despite the scale of his task today, the majority of the economic press agrees with him that fierce spending cuts are necessary. But Osborne should be in no doubt about the level of public opprobium which will gradually build in the years that follow. Perhaps he realises this. According to sources, he plans to eschew the whisky today in favour of a glass of water. “Osborne should be in no doubt about the level of public opprobium which will gradually build”