Forget the Cuts

By Heath, Allister | The Spectator, October 23, 2010 | Go to article overview

Forget the Cuts


Heath, Allister, The Spectator


While Westminster is fixated on public sector cuts, no one has noticed that the cost of living is surging. Ministers ignore the 'misery index' at their peril

To listen to the reporting of the Chancellor's phased and rather limited spending cuts, you would think that the gates of fiscal hell opened at 12.30 p.m.

on Wednesday. They are the 'most savage cuts in our lifetime', said an ITV reporter.

The 'fastest, deepest cuts in public spending ever mounted by a government in modern times', declared a hyperventilating Will Hutton, a newspaper columnist and government adviser. It has been so long since Britain attempted fiscal restraint that a cut in total government spending of under 4 per cent in real terms over four years is treated like the coming of the apocalypse.

That there will be severe pain is not in question. There will be real hardship for the soldiers and public sector workers who are laid off. But job losses will not be the main problem the British economy faces over the next few years. The overall British story now is one of steadily rising employment, with 300,000 more jobs this year. The private sector continues to create jobs faster than the government is cutting them, and by the end of the cuts there should be a million more jobs than there are today.

Yet as the average voter focuses on the cuts in front of him - and not without reason - a meteor is hurtling towards him from behind. Since the recession started, there has been an increasingly large gulf between what politicians are focusing on (public spending and taxes) and what real voters are most worried about (low wages and rising inflation). The real financial burdens on everyday people might do more to undermine support for the government than any cuts programme - yet those burdens are going almost entirely ignored by ministers, who are unable to recognise pain which is not inflicted by the government.

David Cameron sometimes refers to having taken a pay cut, by which he means that he accepted a smaller pay rise when becoming Prime Minister than the one to which he was entitled. The outside world has harsher definitions of pay restraint. Average earnings are up by 1.7 per cent over the past year.

Strip out the protected public-sector workers, and this is just 1.2 per cent. But worse, the value of this money is shrinking at an accelerated rate. Inflation, supposed to be killed off in the new era of Bank of England independence, is running at an extraordinarily high 4.6 per cent a year on the Retail Prices Index.

Once, this figure would have been a matter of national debate. Now, it goes almost entirely unnoticed. Yet its effects are real, and suffered nationwide: the purchasing power of wages is being slashed by stealth.

While the Bank is undoubtedly committed to fighting inflation, the suspicion remains that there are some in government who are secretly delighted to see prices spiralling out of control.

Inflation has long been used as a tool to finance the misbehaviour of unscrupulous governments. Just as £5,000 of savings becomes less impressive due to inflation, £5,000 of debt also shrinks. This is why hugely indebted governments often turn a blind eye to inflation: it is an easy way out. It helps employers: staff are cheaper, if their salaries do not keep pace with inflation. This cuts costs, thereby reducing the need for redundancies. So inflation suits a great many people, but it does not come without pain - and that pain is felt by savers and consumers. …

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