As everyone recognises, Osborne’s so-called Welfare Uprating bill, which will be voted on today, is a purely political contrivance designed to portray Labour as the friend of shirkers. But like other amateur makers of elephant traps, he has fallen into it himself by drawing attention to issues which will cost him dear, and which he could easily have avoided by including the 1% increase in most benefits for each of the next 3 years in the Finance bill after the Autumn Statement in the normal way. His proposal has 4 fundamental flaws, any of which is a powerful reason for not pursuing it, but together are politically and economically explosive.
First, the central reason for the present stagnation is demand deficiency. The benefit cuts as outlined in Osborne’s 2010 budget take £18bn out of the level of demand, and this 4% real terms cut in pay over 3 years will significantly add to this squeeze on demand. Indeed, if Osborne’s current plans are carried through, no less than £28bn will have been taken out of the welfare budget by 2017, almost all of which would have been spend if its low-income recipients had received it. This is making the lack of demand much worse.
Second, as a way of cutting the deficit, it isn’t working. Because growing shortage of demand (benefit cuts, pay cuts) reduces expenditure, it leads to an increasing shortfall too in government revenue receipts, which means public borrowing has to be increased to meet the growing deficit. As a result the government is already after just 2 years having to borrow an additional £228bn beyond what it planned in 2010. That extra borrowing will now rise even further, which will inflate the ire on the hardline-like Tory Right.
Third, Osborne is now clearly falling into an elephant trap of his own making with his own party base. Two-thirds of those having their tax credits cut are in fact in work, so strivers rather than shirkers, and it will hit soldiers, police and nurses who often vote Tory in close-fought marginals. In addition, whilst Osborne gives not a thought about squeezing the poor, snagging the well-off and rich on his cuts in child benefit is turning out uncomfortably painful for him.
Fourth, the Osborne plan is grotesquely unfair at a time when the political sap concerning cuts is rising fast. The poorer half of the population is being hammered hardest by benefit, pay and expenditure cuts, leading to a 6% cut in real personal disposable income, while at the other end of the scale the 10% richest have emerged almost unscathed, the 1% richest have received an income tax cut worth £3bn, and the 1,000 ultra-rich (0.03%) have increased their gains over the last 3 years by £155bn. How soon riots break out is a matter of speculation – I suspect before the end of this year.