21 October 2010

The real impact of the cuts

George Osborne apparently believes that the cuts he announced yesterday are the salvation of the economy, and of the government's finances. However, in reality, they will seriously damage both our economy and our society. Lets look at some of the implications.

Osborne announced just under half a million job cuts. These jobs are people in the public sector whose jobs will go as part of the cuts. If you add in the jobs that will be lost by private sector contractors, charities whose state funding dries up, and jobs that depend on the personal spending of public sector employees (and others whose jobs are lost), then we're probably looking at about a million job losses. Osborne's free-market ideology believes that the private sector will pick up the slack. However, this would mean that the private sector starts creating far more jobs than it did during the last boom, and that's just to keep the number of people in employment stable, not to supply jobs for the people who are already out of work due to the recession.

And this mass unemployment will have serious consequences for the economy, and the governments' finances. Welfare costs will go up at the same time as tax revenue goes down. Therefore, the deficit will not come down as quickly as Osborne projects. In fact, there's a chance that the deficit will actually increase as a result.

Because there will be more people out of work, you would expect both prices and wages to go down. Prices because there is less demand for non-essentials, and wages because with even more people competing for every job the salaries on offer can be lowered, and people will be less willing to press for pay increases. When this happens in an economy, inflation tends to slow down, and often prices begin to lower. This means that people tend to put off purchases, which tends to lead to more deflation, and threatens jobs in retail, and in manufacturing.

Unfortunately for Osborne, high levels of inflation would actually help to pay off the national debt. Because government debt is owed in pounds sterling (rather than, say, US dollars), inflation would mean that we owe less in real terms. Deflation, however, would mean that we owe more in real terms.

Economic Slowdown and the Double Dip
A side effect of the mass unemployment, and of the government generally spending less money is that economic growth will reduce. Whilst I believe that, in the long term, economic growth is environmentally unsustainable, in the short term, this does threaten a very real chance of a double dip recession - a second recession following hot on the heels of the first. If we're lucky, the slowdown caused by the cuts will be slightly less than the growth that's happening already, and things will stay more-or-less the same. Otherwise, we'll be seeing more companies going bust and more people out of work.

Growing Inequality
There is a group of people who will be almost entirely unaffected by the cuts. I like to call this group of people the rich. The more money you earn, the less you depend on the services the government supplies. The less money you have, the more you benefit from those services. Because the government is trying to deal with the deficit almost entirely through spending cuts, people who are already poor will suffer, and far more people will join them at the bottom of the ladder. At the other end of the scale, rich people will continue the trend of the last few decades, where they've accumulated an ever greater share of the nation's wealth.

Social Costs

Finally, there are a whole range of social problems that will be caused by the cuts. Working out all of these costs would take a lot of research, as there are literally hundreds of services that are impacted by the cuts, and in many cases there will be several different social problems that are caused or made worse by the cuts. So let's just take one area of spending as an example. Raising the rail fare cap and slashing bus subsidies is a major part of the savings in transport. This will force many people off public transport and into cars, increasing the number of car accidents, increasing air pollution, and increasing carbon emissions. Raised costs and decreased services will make It harder for those of us who cannot afford to run a car (or who choose not to). It will also make the benefits trap worse - if it costs you more to get to work, the job has to pay more in order to be worth taking.

So, in short, these cuts are likely to cause tremendous damage to the British economy and to British society. They mean that, in the next couple of years, the economy will either end up in a double-dip recession or in a jobless recovery. They will cause a whole range of social and environmental problems, and they may well make it more difficult to reduce the government's deficit and repay the national debt.