George Osborne is ring-fencing the wrong areas, says IoD Wales
Oct 19 2010 By Rhodri Evans
A LEADING business body has warned that the wrong areas of Government spending are being ring-fenced from cuts as the Chancellor prepares to unveil his Comprehensive Review.
The Institute of Directors (IoD) Wales expressed concern that the Coalition’s approach to spending could impair long-term growth.
It argues infrastructure spending should be protected – not the NHS and international development.
Robert Lloyd Griffiths, director of the IoD in Wales, said: “The right way to help short-term aggregate demand and boost long-term aggregate supply is to protect infrastructure spending. Unfortunately the June Budget proposes to halve public sector investment. We urge the Government to revisit this decision in the Spending Review.
“We are concerned that the Coalition seems determined to ring fence NHS and international development spending. This is a political calculation and an economic mistake. Although uncomfortable, the Government should revisit this decision too.”
In general the IoD said that the Government’s emphasis on spending cuts rather than tax hikes was the right way to tackle the budget deficit.
But it voiced concern that the UK’s “already creaking” infrastructure is going to suffer further because of the Coalition’s “salami slicing” approach to cutting the deficit.
Today’s warning by the IoD comes in the wake of a letter of support for Chancellor George Osborne’s deficit reduction strategy signed by 35 business leaders.
The letter – signed by Marks & Spencer chairman Sir Stuart Rose, BT chief executive Ian Livingston and Asda chairman Andy Bond among others – said there was “no reason to believe” that Mr Osborne’s plan to eliminate the £109bn structural deficit within four years will undermine the recovery.
It warned that Labour’s plan to spread deficit reduction over more than one Parliament would be a “mistake” which would leave the UK almost £100bn deeper in debt by 2014-15 and increase the risk of interest rate hikes.
But Shadow Chancellor Alan Johnson yesterday accused the coalition Government of “economic masochism” and warned that the pace of cuts risked destroying jobs and growth.
Mr Johnson said the coalition’s plans depend on an extra 2.5 million private jobs being created to take up the slack from reduced public sector activity. He argued there was “absolutely no sign of that momentum developing in the private sector”.
But the 35 businessmen insisted that “the private sector should be more than capable of generating additional jobs to replace those lost in the public sector, and the redeployment of people to more productive activities will improve economic performance, so generating more employment opportunities.”
Former Bank of England policymaker Danny Blanchflower said the business leaders were “not economists”.
“It’s a terrible, terrible mistake,” warned the Cardiff-educated expert. “The sensible thing to do is to spread [the cuts] over a long time,” he told Bloomberg Television.
“Clearly you have to deal with the deficit, but there is no economics that says you have to deal with it in a week or a month.”
He added: “You have to be mindful of the data and if the data turns down, which it has, you have to adapt… The last thing you do in a recession is make things worse.”
Despite the raging debate over the cuts Mr Osborne has made it clear he is determined to see through his plans, which amount to the deepest cuts to public spending since World War II.
“Our plan is the plan that will restore credibility to the public finances,” the Chancellor said.
“It is what the IMF, the OECD, international observers say is necessary. It is what British business says is necessary.
“So we have to see this through, and the course which I set in the Budget is the one that we have to stick to.
“People in this country know we were on the brink of bankruptcy, and if we are going to have growth and jobs in the future we have got to move this country into a place where people can invest with confidence.”