Written by Cat Stevens and first made famous by the soulful PP Arnold, my mind immediately thought of the 60s classic hit, The First Cut is the Deepest, when I heard George Osborne’s Comprehensive Spending Review on Wednesday.
Clearly our Chancellor was never a fan of Cat Stevens and PP Arnold – nor Rod Stewart or Sheryl Crow, who also had hits with the lover’s refrain. If he had been he might of realised that his first public spending cuts should have been deeper – then he might not still need to be wielding the axe now.
I’m all for having regular reviews of public spending, it’s the only way to keep on top of the leviathan that is our state and its public sector; its tentacles wrapping around us and getting into every nook and cranny possible at cost beyond our means.
But that’s not what this week’s spending review was about; the real purpose was to try and keep what the media calls “the markets” on Osborne’s side. For the thousands of different brokers, advisers, analysts and commentators – together with those that buy, sell and make deals – they need to have confidence that the British Government is not suddenly going to cave in to the pressure from our public service unions and their proxy, Ed Miliband, to change course.
If he were to do that then there would undoubtedly be a run on the pound and we would soon find interest rates going up to counter this. Right now that would be nothing less than catastrophic, forcing many homeowners into negative equity and leaving many more perilously close to it.
What better reassurance to give the markets that Osborne is not for turning than for him to announce a fresh round of savings – to be achieved after 2015?
That this plan was nothing other than a failsafe and uncontroversial PR stunt was quickly evidenced by the new strategy of Labour’s Ed Miliband and Ed Balls of accepting the coalition government’s latest spending plans. Why? For they too are conscious that they cannot afford to have the markets chattering away that a labour victory would be a financial disaster for British households. They need the mood music to be “we’re all in this together” – including the Labour Party.
That this plan is nothing as radical as it could be goes without saying, for Osborne, Cameron and Clegg (together with Miliband and Balls) are all still committed to big government.
This is not some personal prejudice or bilious rancour of mine, but simply that the figures show that while Osborne has found some savings of £11.5 billion the Transport Secretary Patrick McLoughlin also happened to slip out the news that the cost of their High Speed Train set to Birmingham, Manchester and Leeds (HS2 as they like to call it) will be some £10bn more than expected. And this is before the “estimated” £7.5bn cost of the rolling stock is included.
That’s a 30 per cent increase before any track is laid – sound familiar to Edinburgh folks? It rather makes the Edinburgh trams look like an old clockwork toy.
Also, as a political sop to public opinion – which they would rather follow than show the courage to lead – spending on health, education and foreign aid is protected. No cuts in these sectors means the cuts in the others are even more wounding. Again, it’s all for the PR effect.
The economic reality we all must face, however, is that interest rates must eventually begin to go up – whatever the markets think of the government’s addiction to high spending. The Bank of England’s policy of Quantitative Easing (printing money electronically to you and me) has seen to that. George Osborne is hoping and praying it won’t be until after the 2015 general election but that seems unlikely despite his latest axe-wielding.
Some time in the near future our base rate (kept artificially low by the Bank of England) will have to be used to fight the inflation that will leak into the system. The Bank of England is already making the noises that this will happen and giving the warnings if you look for them.
So, for any readers already struggling to meet those monthly payments already when base rates are only 0.5 per cent, let me give some advice for free – start now to find some household savings or ways of raising greater income. The interest rate rise may come in six, 12 or 18 months – but come it will and when it does it will be more difficult to act.
For the Government it will increase its own debt burden, making the need for a further round of public spending cuts – might I suggest that £43bn train set?
The lesson is simple; first cuts should have been the deepest for George Osborne – and he must rue the fact that they weren’t. If you need to find your own cuts, make sure that the first ones are the deepest.