Oct. 21 (Bloomberg) -- British Prime Minister David Cameron’s reliance on welfare cuts to balance the budget left some economists and analysts doubting he will achieve the biggest deficit reduction ever.
That’s because meeting his target, which Chancellor of the Exchequer George Osborne detailed yesterday to Parliament, depends on cutting 7 billion pounds ($11 billion) more than he’d initially planned from the welfare bill -- spending over which the government lacks total control.
Cameron and Osborne say their austerity program is keeping interest rates low and securing the nation’s top-grade credit rating. Their balancing act is to convince the markets they will meet their targets while also convincing voters and their Liberal Democrat coalition partners that the cuts are worth the pain.
“Basically, there’s no room for error,” said Peter Dixon, an economist at Commerzbank AG in London. “The likelihood is that something will go wrong. Even if it doesn’t, and we’re on track, and the costs of putting the fiscal squeeze in place are quite high, the coalition may start to have differing views on whether a tough fiscal stance may be maintained.”
Fitch Ratings endorsed the measures and said they were consistent with Britain’s outstanding bonds -- whose value reached 1 trillion pounds yesterday -- keeping a AAA rating.
Gilts extended gains, sending the yield on 10-year securities down 2 basis points to 2.97 percent. The pound fell 0.5 percent to $1.5771 at 8 a.m. in London.
Osborne’s spending cuts will peak at an 81 billion-pound reduction in 2015 as he seeks to shrink the deficit to 2 percent of economic output from more than 10 percent today. The plan, which will lead to half a million public job losses, adds to existing plans to squeeze welfare by 11 billion pounds, an overall cut of about 8 percent in the bill for unemployment aid, housing assistance, disability payments and pensions.
“People find themselves trapped in an incomprehensible out-of-work benefit system for their entire lifetimes, because it simply does not pay to work,” Osborne said. “This robs them of their aspirations and opportunities. And it costs the rest of the country a fortune.”
He said those savings enabled him to cut departmental spending by 19 percent on average instead of the 25 percent he had planned in June and gave him an extra 2 billion pounds to spend on building and other capital projects.
“The sheer scale of some of these cuts casts some doubt on whether they can be realized in practice,” said Jonathan Loynes of Capital Economics. “Particularly if, as we expect, the economy turns out to be significantly weaker.”
The depth of the cuts is comparable only to those carried out by Eric Geddes between 1920 and 1925, when spending was reduced by the equivalent of 100 billion pounds in today’s prices, according a paper by Christopher Hood of the University of Oxford. The “Geddes Ax’ fell as a Liberal-Tory coalition sought to reverse the fiscal legacy of World War I.
The savings Osborne is counting on may not materialize if the cuts crimp economic growth, say economists and analysts.
‘‘There is a very basic problem here,’’ said Tim Bale, a professor of politics at the University of Sussex. ‘‘If these spending changes -- which take 81 billion pounds out of the economy -- have any sort of negative effect on economic activity and unemployment rises, then that would quickly eat up any savings made in the welfare cutbacks.’’
Social-security spending fluctuates with the economy. It has risen from less than 10 percent of gross domestic product when Margaret Thatcher took office in 1979 to 13 percent today and accounts for almost 30 percent of total government spending. It rose after each of the three recessions over the past 30 years, peaking above 14 percent of GDP in the early 1990s.
‘‘Local agents who administer benefits are subject to local political pressures,’’ said Wyn Grant, professor of politics at Warwick University. ‘‘Even if the local administrators do not know the people whose cases they administer, there may well be a local culture that is sympathetic to, for example, people who have been unemployed for long periods of time.’’
From 2013, household benefit payments will be capped at around the median earned income, which is 500 pounds per week, for households with children -- regardless how many -- and 350 pounds a week those with no kids.
Critics also questioned the lack of detail in Osborne’s report. Accompanying documents to Osborne’s report listed examples of cost savings.
While there are some specifics, such as turning off the lights in Ministry of Defense buildings, saving 2,000 pounds an office a year, other proposals offered little detail, including saving 400 million pounds a year through ‘‘efficiency gains” in procurement.
“This has been little more than an exercise in accounting with little or no thought given to implementation,” said Marc Ostwald, an bond analyst at Monument Securities in London. “There are a few specifics on quite marginal things and a lot of buck-passing. We’re really none the wiser.”
The opposition Labour Party said the severity of the cuts threaten to derail economic recovery and imperil the livelihoods of workers.
“We have seen people cheering the deepest cuts to public spending in living memory,” the party’s treasury spokesman Alan Johnson said yesterday. “This is what they came into politics for. Today is the day that abstract figures and spreadsheets turn into people’s jobs and people’s futures.”
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