June 27 (Bloomberg) -- U.K. Chancellor of the Exchequer George Osborne set out spending cuts for the 2015 election year, seeking to appeal to disaffected Conservatives while pushing the Labour opposition to come up with an acceptable alternative.
Announcing 11.5 billion pounds ($17.5 billion) of budget reductions yesterday, Osborne protected spending on defense, schools and hospitals and increased outlays on science and transport infrastructure at the expense of local governments and welfare.
The chancellor taunted Labour lawmakers in Parliament in London, asking them what their alternative was. Labour’s Treasury spokesman, Ed Balls, said Osborne was being forced to make the cuts to “pay for his economic failure.” Recent data suggest an economic recovery is getting under way after a return to growth in the first quarter. Bank of England Governor Mervyn King said this week that growth is still “too weak to be satisfactory.”
“The whole statement was quite political, designed to set up elephant traps for the Labour Party to stumble into,” Wyn Grant, professor of politics at Warwick University, said in a telephone interview. “Osborne is trying to portray the Labour Party as sticking up for benefit claimants.”
Osborne’s clampdown on spending has helped keep bond yields close to record lows. Ten-year gilts yielded 43 basis points more than German bunds on average since the Conservative-led coalition took office in May 2010, versus 96 basis points the day before the election.
“My political opponents would probably want to put taxes up,” Osborne told ITV’s “Daybreak” program this morning. “My instinct is: let’s try to control spending, like welfare bills.”
From 2015, the government will set a cap on total welfare spending, excluding state pensions, Osborne announced yesterday. The Office for Budget Responsibility spending watchdog will have a duty to warn him publicly if ministers are on course to breach the limit. He didn’t offer a likely level for the cap.
“We have set out our plans, we have set out our economic strategy,” Osborne told Balls in Parliament. “Those who disagree with them -- advance an alternative or retreat from the battlefield.”
The Department for Work and Pensions saw its budget reduced by 9.5 percent in 2015-16, among the biggest cuts for any ministry. Money will be saved by increasing rents on state-owned housing, and the government will also make it harder to claim joblessness benefits.
Some of the “more populist” policies, including one to force benefits claimants to learn English and changing the rules so that those seeking work must be unemployed for seven days, not the current three, before they can ask for state aid are “an attempt to undermine the risk of Conservative voters going across to UKIP,” Grant said.
The U.K. Independence Party, which campaigns for withdrawal from the European Union, has been targeting voters concerned about immigration, at the expense of the Tories’ poll ratings. UKIP is regularly attracting more than 10 percent support in national surveys, while the Tories are around 7 points behind Labour.
According to the independent Institute for Fiscal Studies, Osborne is only halfway through a squeeze that will reduce departmental budgets by about 20 percent, the fifth-largest program of cuts among 29 advanced economies. The chancellor said 144,000 civil servants will lose their jobs in 2015-16.
The Department for Communities and Local Government took one of the biggest hits, with 10 percent taken off its budget in real terms. The Business, Innovation and Skills Department suffered a 4.8 percent cut, while securing a guarantee of science spending every year until 2020.
“It’s going to get harder to keep hammering budgets; we’re all crossing our fingers economic growth saves the day,” Philip Shaw, chief economist at Investec Securities in London, said in a telephone interview. “Eventually there comes a point when you cannot cut spending any further and that potentially means increasing taxes.”
Chief Secretary to the Treasury Danny Alexander will today give details of 100 billion pounds worth of capital spending planned between 2015 and 2020. Projects are set to include government guarantees on new nuclear plants, spending on the north-south high-speed rail link and facilitating shale-gas extraction.
The Department for Transport saw its total budget rise as Osborne pumped money into infrastructure. The Treasury said that every road program that had planning permission was now under way. The defense budget was reduced by about 2 percent, one of the smallest reductions. While the Home Office saw its overall budget cut by 6.1 percent, that was also less than many other departments. The intelligence agencies’ budget will go up, while spending on police counter-terrorism work won’t be reduced.
There are individual Cabinet ministers who benefit from the announcements yesterday. By protecting their departments’ spending from the deepest cuts, Tory Home Secretary Theresa May, Defence Secretary Philip Hammond and Transport Secretary Patrick McLoughlin have strengthened their personal positions, as has Liberal Democrat Business Secretary Vince Cable. The Conservative mayor of London, Boris Johnson, also benefited from an announcement of infrastructure investment.
For the Tory ministers “it enhances their political reputation within the Conservative Party, and also for Vince Cable who is seen as a potential successor to Nick Clegg,” the Liberal Democrat leader and deputy prime minister, Grant said. “In any future leadership contest in either party the position of these people is strengthened because they can show they can defend their budgets, and, in the case of the Tory party, relevant to core values upheld by the backbenchers.”
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