David Cameron and Nick Clegg are still travelling in the same direction. But beyond cutting the deficit, does this coalition have a purpose?
In a phrase that might haunt him, David Cameron once said that “it doesn’t matter where you come from. It’s where you are going that counts.” But, two years after the heady day in the Downing Street rose garden which announced an experiment in coalition government, where is he going? There is no shortage of activity in Whitehall and yet it all somehow adds up to less than the sum of its parts. It is not obvious whether, beyond reducing the deficit, this government really has a mission at all.
Another way of posing the same puzzle is to inquire into the character of the prime minister himself. Is the real David Cameron the radical who had his 2006 party conference audience applauding gay marriage? Or did Cameron find his authentic voice in his 2008 speech when he offered a golf-club bore’s account of a health-and-safety state? This lack of definition is, in part, deliberate.
Cameron is suspicious, as good conservatives tend to be, of grand schemes. In his Keith Joseph Memorial Lecture in 2005, he praised the small remedies of “practical conservatism,” contrasting them favourably with “ideological politics.” The answer to what Cameron is will have to be sought in what Cameron does.
It would be churlish not to note that he does it rather well. Cameron’s response to the Bloody Sunday report in June 2010 was so well-judged that it drew spontaneous applause from the crowd that had gathered to watch in central Belfast. Barack Obama clearly regards Cameron as an ally worth treating to a basketball match. Close observers of the prime minister in Whitehall attest to his assurance in the job, especially in a crisis.
And what Cameron does he has to do in concert with the Liberal Democrats. Despite great foreboding on both sides, and some serious disputes, coalition is working tolerably well. There is regular speculation that the coalition is about to break apart. Yet, two years in, the chance of divorce is slender. The marriage is confirmed by the fact that the fixed-term Parliament Act makes it harder than usual to dissolve. It is possible, though, if divorce were in the interests of the two parties, but it clearly is not.
Coalition has not exactly been easy, least of all for the Liberal Democrats, whose support has collapsed to less than 10 per cent—the price of making a frivolous promise on tuition fees that a party of opposition never believed it would have to honour. There have also been some serious disputes. The argument about the referendum over the Alternative Vote caused needless friction. Liberal Democrats looked more than askance when the prime minister used Britain’s veto over the European fiscal compact. A more tepid argument is likely over reform of the House of Lords.
The 2012 budget was, in a way, a stress test for the coalition. In 1947, Hugh Dalton, the chancellor of the exchequer, was forced to resign when he inadvertently released a few clauses of his budget to a journalist minutes before he spoke in the House of Commons. This year, most of the budget was leaked in advance by coalition partners trying to gain the credit. When Gordon Brown was chancellor he did not even tell his own prime minister what was in the budget until the day before. This time around everyone who read a newspaper knew. It was unconventional but it was not necessarily worse.
The coalition might have profited from a little more care with the content, though. The budget took fifty minutes to deliver and three weeks to unravel. Abolishing the 50p rate of income tax risked the government’s claim that the burden of austerity has been equally shared. Trying to smooth out the anomaly in VAT that has long existed between different types of hot food led to a mostly absurd row which turned the Tory party from the nasty party into the pasty party. The restriction on the tax relief available on charitable donations brought on an unwinnable fight against the charitable sector.
There is no obvious answer to the puzzle in foreign policy. William Hague, the foreign secretary, opened his tenure with four speeches which managed the subtle task of signalling a different approach from his Labour predecessors without ever quite saying what that meant. The early policy appeared to be mercantilist in inspiration and quietist in practice, with a promise that troops would leave Afghanistan by 2015. The full panoply of Conservative foreign policy looked to be in operation when a poorly prepared prime minister used the British veto over fiscal agreement at the Brussels summit. Though this caused delight among the many Eurosceptics on the Conservative backbenches, who rightly think of the prime minister as one of theirs, it rapidly became clear that this veto had prevented nothing from happening. Europe went on with its fiscal compact without Britain. The consequences of British isolation will play out over many years but it is unlikely that India and China are really interested in bilateral relationships with Britain alone. The serious conversations take place with the EU as a bloc. However, the easy notion that the government was retreating from the world was exploded by the intervention in Libya which, to the great credit of the foreign secretary and the prime minister, was clear and decisive.
It may be that Cameron’s time as prime minister comes to be defined, like so many of his predecessors, by foreign adventures. But, for the moment his principal purpose is closer to hand. What Cameron has to do is to reduce the deficit. If there was ever any doubt about the purpose he set himself, there was none about the task allotted to him by inheritance.
***
This is not what he hoped to be doing. Austerity was Plan B from the very beginning. Plan A was to sue for peace with the public sector, to seek to eradicate child poverty, to commit strongly to the values of the National Health Service, to set tough environmental and aid targets and to give off a general air of being comfortable with modern social mores. In the event, child poverty is rising and the environment has been relegated to the second division of priorities.
There is, as it has turned out, one issue that dominates this government almost as if the nation were at war. It is hard to see beyond the policies and impact of austerity. The poor state of the public finances means that every budget in this parliament will be little more than a footnote to the first. The emergency budget, delivered in June 2010, just a month after taking office, set a course from which the government will not be diverted. The character of the government derives, more than anything else, from the decisive political choice that George Osborne made in 2010 to attempt to clear the deficit within a single parliament.
Though the chancellor, seized by his own exaggerated comparison of Britain with Greece, tried to pass off his first budget as unavoidable, it was a conscious choice. Alastair Darling’s plan—to halve the deficit in four years—might well have met a sorry fate under Gordon Brown. But the Darling plan would probably have sufficed for Osborne and Cameron because the markets would have accepted their bona fides as spending cutters.
The importance of the choice was more political than economic. The difference between the Osborne plan and that which Darling had pledged to implement for Labour was less than half of one per cent of GDP. It has been slightly ridiculous to hear Labour and the Tories trading blows about whether the Darling plan would have allowed growth to flourish while the Osborne plan choked off the recovery. But the politics of deficit reduction do not correspond neatly to the economics.
By choosing to clear the deficit in a single parliament, rather than merely halve it, Osborne has invited the criticism that, by his action, he has ruined an incipient economic recovery. The truth is that the crisis in the eurozone has had a significant depressing impact on GDP and that spending cuts have also diminished growth prospects. The bulk of the cuts would have been happening whoever was in government but, by moving so quickly, Osborne made a parlous political situation worse.
Wherever the fault truly lies, the plan certainly isn’t working out. In June 2010 the chancellor was predicting that growth for 2011-12 would be 2.3 per cent. He has progressively reduced that forecast until it came to rest at 0.8 per cent. Even assuming no more hiccups, by the time Osborne is able to balance the books, he will have borrowed £158bn more than he anticipated.
It is not that the coalition has no other achievements to its credit. The Office for Budget Responsibility has been a good addition to the landscape of policymaking. The long-cherished ambition of successive Liberal parties to take people out of income tax at the bottom end is being realised. The top rate of income tax has been cut. The link with earnings has been restored for pensions, the retirement age raised to 67 and public sector pensions are being reformed.
However, all of this has been crowded out by the absence of growth. The assumptions of policy in 2010 seemed fanciful at the time and seem more so now. Export growth and private job creation were never likely to live up to the forecasts of 2010. It was ideologically simplistic to think that, by stripping back the state, the private sector would ride instantly to the rescue. In his latest budget, Osborne unveiled tax cuts as his latest growth measure. Corporation tax has fallen from 28 per cent to 24 per cent and the top rate of income tax reduced from 50p to 45p.
The absence of growth has left the government in the peculiar position of searching for exactly the industrial strategy that it had denounced as a return to corporatism before the last election. One of the first acts of the government, to rule out a third runway at Heathrow airport, deprived Britain of the aviation capacity it needs. Capital investment has been cut. Capping immigration has also had a depressing economic effect. The best growth measure so far, though its effects will not be felt for many years, is the liberalisation of planning laws.
The second conscious choice that Osborne made, which will prove fateful for his ambition to spread the burden of pain equally, was his method of deficit reduction. In the emergency budget, the chancellor committed himself to a formula for deficit reduction in which 23 per cent of the money would come from tax rises and 77 per cent would come from spending cuts. As the largest item of expenditure is the welfare bill and as the recipients of welfare are, overwhelmingly, the least well off, spending cuts are almost bound to affect the poor more than the rich.
A benefit cap has been announced, intended to ensure that no family on out-of-work benefits gains more than a family in work. One of the great chimeras of British welfare policy, the ambition to fold lots of state benefits (perhaps eventually even all of them) into a single Universal Credit, is stuck somewhere in Whitehall on the hard drive of a supercomputer, waiting to be turned on. Housing benefit has been capped and child benefit taken away from the well-off. Incapacity benefit claimants have been reduced by a third, mainly by reclassifying them as ready to work but unemployed through a much tougher Work Capability Assessment.
The effects are already being felt in the bottom half of the income scale where the government’s changes have been almost perfectly regressive. So far, under this government, a family with children loses a greater proportion of its income the poorer it is. The outcome is even harsher for families with young children.
The fortunes of the government are now, in large part, a bet on a rapid return to growth. This is true in the obvious sense that without growth the treasury will not have the tax revenues to repair the public finances. It is also true that living standards for people on middle incomes are stuck and that it would be uncomfortable, to say the least, to go into an election campaign with real wages still falling.
But the absence of growth has an even bigger implication. The state of public finances conditions every single department of state. The bargain struck by the Blair governments—extra money as a bribe for limited reform—is no longer possible. Now, the same results will have to be obtained at a lower price. This makes reform of health, education and welfare an essential component of austerity. The task that this generation of Conservatives has inherited suits their predispositions—a smaller, smarter state, run less directly from the centre.
The most obvious ditch into which this noble ambition has fallen has been the NHS. Cameron’s claim to be a new kind of Tory rested largely on safe stewardship of the NHS. It was widely assumed that this would mean careful inactivity. Labour had left a roster of incomplete reform. The obvious thing to do, for a government that had repeatedly promised no major reorganisation, was to redouble the extant change and add no more.
Instead, to general bemusement, Andrew Lansley, the health secretary, began precisely the process of organisational deckchair-shuffling that Cameron had promised to avoid. Lansley’s bill will rearrange 151 primary care trusts into 279 commissioning groups led by GPs. The mechanisms of competition between providers, which might realistically have improved the service, were part of the price that Lansley had to pay to get his bruised bill through parliament.
The argument on the NHS has been, as it usually is, sentimental and unenlightening. The truth is that Lansley’s bill is neither a threat to the NHS nor its saviour. The government has spent a fortune in political capital on a bill that does nothing to address the chronic problems that the NHS actually faces. The British population is getting older and the cost of providing healthcare within the NHS is increasing by 7 per cent per annum. Chronic diseases and the cost of old people who end up in hospital as a result of inadequate social care could bankrupt the service. The NHS needs to save £20bn by 2015 which is, on its own, a demand for a 4 per cent improvement in productivity a year. None of these serious problems will be addressed by the neutered NHS bill. Whilst achieving very little, the government has thrown away, in the most extraordinarily cavalier fashion, a fledgling reputation for being a good custodian of the NHS.
In education policy, the government has claimed to be reshaping the state for an era in which the public sector will consume less of the nation’s resources. The Academies Act, which gave the secretary of state the power to grant academy status to any school, has led to 116 new academies, 24 free schools and 281 applications waiting to be heard. The education secretary, Michael Gove, gets a lot of headlines for his belief that standards have fallen and that the answer is to expel peripheral subjects from the statistics (the so-called English baccalaureate) and for his proposed changes to the way A-Level examinations are set. These are issues that will please the crowd behind him in parliament, but it is the greater diversity and number of schools, all self-governing, that promises to raise standards, not the commands from the education department.
If this term in government is about more than deficit reduction, it will find its purpose only if it devises new methods and new sources of finance to reform monolithic public services. The outline of this is clear in the extension of local responsibilities that Eric Pickles is sponsoring in the communities department. It is visible in the white paper on the police which sets outs plans for directly elected police and crime commissioners. It may even represent a revival of the dormant notion of the Big Society.
To carry out a reform of this magnitude at any time is hard enough. To do so while slashing the money available is a task of unprecedented difficulty. The character of most governments does not usually emerge until its second term. This was largely true of Thatcher and Blair. But politics is faster now and by 2015 the British state should certainly be smaller. Whether it is also more effective is the question on which the fortune of progressive conservatism now rests.
In a phrase that might haunt him, David Cameron once said that “it doesn’t matter where you come from. It’s where you are going that counts.” But, two years after the heady day in the Downing Street rose garden which announced an experiment in coalition government, where is he going? There is no shortage of activity in Whitehall and yet it all somehow adds up to less than the sum of its parts. It is not obvious whether, beyond reducing the deficit, this government really has a mission at all.
Another way of posing the same puzzle is to inquire into the character of the prime minister himself. Is the real David Cameron the radical who had his 2006 party conference audience applauding gay marriage? Or did Cameron find his authentic voice in his 2008 speech when he offered a golf-club bore’s account of a health-and-safety state? This lack of definition is, in part, deliberate.
Cameron is suspicious, as good conservatives tend to be, of grand schemes. In his Keith Joseph Memorial Lecture in 2005, he praised the small remedies of “practical conservatism,” contrasting them favourably with “ideological politics.” The answer to what Cameron is will have to be sought in what Cameron does.
It would be churlish not to note that he does it rather well. Cameron’s response to the Bloody Sunday report in June 2010 was so well-judged that it drew spontaneous applause from the crowd that had gathered to watch in central Belfast. Barack Obama clearly regards Cameron as an ally worth treating to a basketball match. Close observers of the prime minister in Whitehall attest to his assurance in the job, especially in a crisis.
And what Cameron does he has to do in concert with the Liberal Democrats. Despite great foreboding on both sides, and some serious disputes, coalition is working tolerably well. There is regular speculation that the coalition is about to break apart. Yet, two years in, the chance of divorce is slender. The marriage is confirmed by the fact that the fixed-term Parliament Act makes it harder than usual to dissolve. It is possible, though, if divorce were in the interests of the two parties, but it clearly is not.
Coalition has not exactly been easy, least of all for the Liberal Democrats, whose support has collapsed to less than 10 per cent—the price of making a frivolous promise on tuition fees that a party of opposition never believed it would have to honour. There have also been some serious disputes. The argument about the referendum over the Alternative Vote caused needless friction. Liberal Democrats looked more than askance when the prime minister used Britain’s veto over the European fiscal compact. A more tepid argument is likely over reform of the House of Lords.
The 2012 budget was, in a way, a stress test for the coalition. In 1947, Hugh Dalton, the chancellor of the exchequer, was forced to resign when he inadvertently released a few clauses of his budget to a journalist minutes before he spoke in the House of Commons. This year, most of the budget was leaked in advance by coalition partners trying to gain the credit. When Gordon Brown was chancellor he did not even tell his own prime minister what was in the budget until the day before. This time around everyone who read a newspaper knew. It was unconventional but it was not necessarily worse.
The coalition might have profited from a little more care with the content, though. The budget took fifty minutes to deliver and three weeks to unravel. Abolishing the 50p rate of income tax risked the government’s claim that the burden of austerity has been equally shared. Trying to smooth out the anomaly in VAT that has long existed between different types of hot food led to a mostly absurd row which turned the Tory party from the nasty party into the pasty party. The restriction on the tax relief available on charitable donations brought on an unwinnable fight against the charitable sector.
There is no obvious answer to the puzzle in foreign policy. William Hague, the foreign secretary, opened his tenure with four speeches which managed the subtle task of signalling a different approach from his Labour predecessors without ever quite saying what that meant. The early policy appeared to be mercantilist in inspiration and quietist in practice, with a promise that troops would leave Afghanistan by 2015. The full panoply of Conservative foreign policy looked to be in operation when a poorly prepared prime minister used the British veto over fiscal agreement at the Brussels summit. Though this caused delight among the many Eurosceptics on the Conservative backbenches, who rightly think of the prime minister as one of theirs, it rapidly became clear that this veto had prevented nothing from happening. Europe went on with its fiscal compact without Britain. The consequences of British isolation will play out over many years but it is unlikely that India and China are really interested in bilateral relationships with Britain alone. The serious conversations take place with the EU as a bloc. However, the easy notion that the government was retreating from the world was exploded by the intervention in Libya which, to the great credit of the foreign secretary and the prime minister, was clear and decisive.
It may be that Cameron’s time as prime minister comes to be defined, like so many of his predecessors, by foreign adventures. But, for the moment his principal purpose is closer to hand. What Cameron has to do is to reduce the deficit. If there was ever any doubt about the purpose he set himself, there was none about the task allotted to him by inheritance.
***
This is not what he hoped to be doing. Austerity was Plan B from the very beginning. Plan A was to sue for peace with the public sector, to seek to eradicate child poverty, to commit strongly to the values of the National Health Service, to set tough environmental and aid targets and to give off a general air of being comfortable with modern social mores. In the event, child poverty is rising and the environment has been relegated to the second division of priorities.
There is, as it has turned out, one issue that dominates this government almost as if the nation were at war. It is hard to see beyond the policies and impact of austerity. The poor state of the public finances means that every budget in this parliament will be little more than a footnote to the first. The emergency budget, delivered in June 2010, just a month after taking office, set a course from which the government will not be diverted. The character of the government derives, more than anything else, from the decisive political choice that George Osborne made in 2010 to attempt to clear the deficit within a single parliament.
Though the chancellor, seized by his own exaggerated comparison of Britain with Greece, tried to pass off his first budget as unavoidable, it was a conscious choice. Alastair Darling’s plan—to halve the deficit in four years—might well have met a sorry fate under Gordon Brown. But the Darling plan would probably have sufficed for Osborne and Cameron because the markets would have accepted their bona fides as spending cutters.
The importance of the choice was more political than economic. The difference between the Osborne plan and that which Darling had pledged to implement for Labour was less than half of one per cent of GDP. It has been slightly ridiculous to hear Labour and the Tories trading blows about whether the Darling plan would have allowed growth to flourish while the Osborne plan choked off the recovery. But the politics of deficit reduction do not correspond neatly to the economics.
By choosing to clear the deficit in a single parliament, rather than merely halve it, Osborne has invited the criticism that, by his action, he has ruined an incipient economic recovery. The truth is that the crisis in the eurozone has had a significant depressing impact on GDP and that spending cuts have also diminished growth prospects. The bulk of the cuts would have been happening whoever was in government but, by moving so quickly, Osborne made a parlous political situation worse.
Wherever the fault truly lies, the plan certainly isn’t working out. In June 2010 the chancellor was predicting that growth for 2011-12 would be 2.3 per cent. He has progressively reduced that forecast until it came to rest at 0.8 per cent. Even assuming no more hiccups, by the time Osborne is able to balance the books, he will have borrowed £158bn more than he anticipated.
It is not that the coalition has no other achievements to its credit. The Office for Budget Responsibility has been a good addition to the landscape of policymaking. The long-cherished ambition of successive Liberal parties to take people out of income tax at the bottom end is being realised. The top rate of income tax has been cut. The link with earnings has been restored for pensions, the retirement age raised to 67 and public sector pensions are being reformed.
However, all of this has been crowded out by the absence of growth. The assumptions of policy in 2010 seemed fanciful at the time and seem more so now. Export growth and private job creation were never likely to live up to the forecasts of 2010. It was ideologically simplistic to think that, by stripping back the state, the private sector would ride instantly to the rescue. In his latest budget, Osborne unveiled tax cuts as his latest growth measure. Corporation tax has fallen from 28 per cent to 24 per cent and the top rate of income tax reduced from 50p to 45p.
The absence of growth has left the government in the peculiar position of searching for exactly the industrial strategy that it had denounced as a return to corporatism before the last election. One of the first acts of the government, to rule out a third runway at Heathrow airport, deprived Britain of the aviation capacity it needs. Capital investment has been cut. Capping immigration has also had a depressing economic effect. The best growth measure so far, though its effects will not be felt for many years, is the liberalisation of planning laws.
The second conscious choice that Osborne made, which will prove fateful for his ambition to spread the burden of pain equally, was his method of deficit reduction. In the emergency budget, the chancellor committed himself to a formula for deficit reduction in which 23 per cent of the money would come from tax rises and 77 per cent would come from spending cuts. As the largest item of expenditure is the welfare bill and as the recipients of welfare are, overwhelmingly, the least well off, spending cuts are almost bound to affect the poor more than the rich.
A benefit cap has been announced, intended to ensure that no family on out-of-work benefits gains more than a family in work. One of the great chimeras of British welfare policy, the ambition to fold lots of state benefits (perhaps eventually even all of them) into a single Universal Credit, is stuck somewhere in Whitehall on the hard drive of a supercomputer, waiting to be turned on. Housing benefit has been capped and child benefit taken away from the well-off. Incapacity benefit claimants have been reduced by a third, mainly by reclassifying them as ready to work but unemployed through a much tougher Work Capability Assessment.
The effects are already being felt in the bottom half of the income scale where the government’s changes have been almost perfectly regressive. So far, under this government, a family with children loses a greater proportion of its income the poorer it is. The outcome is even harsher for families with young children.
The fortunes of the government are now, in large part, a bet on a rapid return to growth. This is true in the obvious sense that without growth the treasury will not have the tax revenues to repair the public finances. It is also true that living standards for people on middle incomes are stuck and that it would be uncomfortable, to say the least, to go into an election campaign with real wages still falling.
But the absence of growth has an even bigger implication. The state of public finances conditions every single department of state. The bargain struck by the Blair governments—extra money as a bribe for limited reform—is no longer possible. Now, the same results will have to be obtained at a lower price. This makes reform of health, education and welfare an essential component of austerity. The task that this generation of Conservatives has inherited suits their predispositions—a smaller, smarter state, run less directly from the centre.
The most obvious ditch into which this noble ambition has fallen has been the NHS. Cameron’s claim to be a new kind of Tory rested largely on safe stewardship of the NHS. It was widely assumed that this would mean careful inactivity. Labour had left a roster of incomplete reform. The obvious thing to do, for a government that had repeatedly promised no major reorganisation, was to redouble the extant change and add no more.
Instead, to general bemusement, Andrew Lansley, the health secretary, began precisely the process of organisational deckchair-shuffling that Cameron had promised to avoid. Lansley’s bill will rearrange 151 primary care trusts into 279 commissioning groups led by GPs. The mechanisms of competition between providers, which might realistically have improved the service, were part of the price that Lansley had to pay to get his bruised bill through parliament.
The argument on the NHS has been, as it usually is, sentimental and unenlightening. The truth is that Lansley’s bill is neither a threat to the NHS nor its saviour. The government has spent a fortune in political capital on a bill that does nothing to address the chronic problems that the NHS actually faces. The British population is getting older and the cost of providing healthcare within the NHS is increasing by 7 per cent per annum. Chronic diseases and the cost of old people who end up in hospital as a result of inadequate social care could bankrupt the service. The NHS needs to save £20bn by 2015 which is, on its own, a demand for a 4 per cent improvement in productivity a year. None of these serious problems will be addressed by the neutered NHS bill. Whilst achieving very little, the government has thrown away, in the most extraordinarily cavalier fashion, a fledgling reputation for being a good custodian of the NHS.
In education policy, the government has claimed to be reshaping the state for an era in which the public sector will consume less of the nation’s resources. The Academies Act, which gave the secretary of state the power to grant academy status to any school, has led to 116 new academies, 24 free schools and 281 applications waiting to be heard. The education secretary, Michael Gove, gets a lot of headlines for his belief that standards have fallen and that the answer is to expel peripheral subjects from the statistics (the so-called English baccalaureate) and for his proposed changes to the way A-Level examinations are set. These are issues that will please the crowd behind him in parliament, but it is the greater diversity and number of schools, all self-governing, that promises to raise standards, not the commands from the education department.
If this term in government is about more than deficit reduction, it will find its purpose only if it devises new methods and new sources of finance to reform monolithic public services. The outline of this is clear in the extension of local responsibilities that Eric Pickles is sponsoring in the communities department. It is visible in the white paper on the police which sets outs plans for directly elected police and crime commissioners. It may even represent a revival of the dormant notion of the Big Society.
To carry out a reform of this magnitude at any time is hard enough. To do so while slashing the money available is a task of unprecedented difficulty. The character of most governments does not usually emerge until its second term. This was largely true of Thatcher and Blair. But politics is faster now and by 2015 the British state should certainly be smaller. Whether it is also more effective is the question on which the fortune of progressive conservatism now rests.
