Terrible news for the Coalition (and Labour)

The growth figures in George Osborne’s budget are terrible news for the coalition. But they hardly make good reading for Labour, as the party contemplates the possibility of inheriting this mess in two years’ time. Less growth means less tax, more welfare spending, more debt and public services squeezed in the middle.

The Chancellor announced the spending limits for 2015/16 which the next government will inherit and they look pretty awful. The detail will all be fleshed out in June’s Spending Review, but yesterday we learned that Osborne will avoid an outright cut in real public spending on the eve of the election. However, with the economy performing so badly a lot more of what money there is will need to be spent on benefits and debt repayments. As a result the Treasury unveiled plans for a further 2.7% cut to public service spending in 2015. By then the protected areas of health, schools and international development will make up around half of departmental spending, so every other area will face something a good deal worse, perhaps a real cut of 5% in a single year.

If that’s bad, it looks even worse for years two and three of the next parliament, which will be the subject of an immediate Spending Review if Labour wins. On Osborne’s new plans current public service spending would plummet by around 4% for two years in a row, and that’s on top of all the pain public services have already had to endure. These numbers are frankly unbelievable and presumably have only been concocted deep within the Treasury to spare Osborne the humiliation of having to extend austerity into 2019.

The Fabian Society’s Commission on Future Spending Choices is weighing up what this all means for an incoming 2015 government. Our findings will emerge later in the year, but speaking personally, I find it increasingly hard to imagine how Labour could accept George Osborne’s spending plans for the next parliament, unless he drastically revises them himself. Adopting the current plans would mean total real cuts of 17% across the public services since 2010, but of course the figures would be far higher outside the protected areas.

It would also mean that spending cuts would take the vast majority of the pain of deficit reduction. By my reckoning tax rises from 2010 to 2017 will make up little more than 10% of all deficit reduction, compared to the 30% Alistair Darling originally envisaged. Even the Conservatives will probably end up raisings taxes a bit, either before or after an election, so Labour must be wary of boxing itself in.

That’s not to say the Left can plan for an end to the pain of austerity. I would expect that the best a future Labour chancellor could deliver would be a freeze to overall public service spending, which would still create real pressures and no doubt cuts to certain programmes. And all this assumes that the latest OBR projections for growth are correct. Since they’ve over-shot so often before, a future government could face even worse fiscal choices than the numbers published today suggest.

One last thought: in spite of all this pain, ironically, George Osborne hasn’t even achieved his own ideological goal of shrinking the size of the state as a share of GDP. By the end of his austerity programme, public spending will remain at 40.5% of the economy, close to the long-term British average, compared to the 39% Osborne hoped for just a year ago. However, those of us on the left should not be celebrating another failure by the Chancellor. This is not a conversion to social democracy but a sad consequence of the economy being so much smaller than Osborne originally expected.

Andrew Harrop is the General Secretary of the Fabian Society