The so-called ‘cuts’ have dominated the political agenda since the coalition government was formed in May. In totality, the cuts are extraordinarily modest, amounting to a real terms reduction of perhaps 2% of GDP by the end of the Parliament. Although these changes in public spending have been variously described as the most austere since 1945, since the Korean War or since the 1970s, this is more a reflection of the inexorable increase in public sector spending by governments of all political colours rather than the dramatic scale of the cuts themselves.
The decision to ring-fence certain areas of public spending and the growing debt repayments mean there is a substantial reallocation of spending which will lead to job losses. Clearly, a serious reduction in public spending would have made these numbers more dramatic, but even at current levels this leaves the private sector facing the challenge of creating jobs for perhaps as many as a million workers if unemployment is not to rise.
The government’s priorities in 2011 need to switch from fiscal retrenchment to supply-side reform if this challenge is to be met. At the CBI conference last month, the Prime Minister claimed his “approach was clear” –the phrase that so often seems to immediately precede a politician saying something vague and impenetrable.
David Cameron said “British business should have no more vocal champion than the British government” and went on to list a range of proactive and expensive government efforts to assist commerce, including £200bn of infrastructure investment and £200m for “technology and innovation centres”.
He refused to become engaged “in some sterile debate between laissez-faire and hands-on government”. But this debate is not sterile at all. It is vital, pertinent and has a direct impact on whether many hundreds of thousands of people will find themselves in gainful employment or on welfare in the coming years.
In much the same way that the trend in government spending has been upwards, the same has been true of the regulatory environment. As IEA research showed earlier this year, the cost to business merely of complying with Britain’s fiendishly complex tax code amounts to upwards of £15bn per annum and is a particularly severe burden on smaller companies.
This summer, the coalition decided to press ahead with the previous administration’s Equality Act, imposing further costs and duties on businesses. The EU’s directive on agency and temporary workers – which gives them similar employment rights to permanent employees – is coming into effect next year and will act as a disincentive for companies to take on new employees.
The “sterile” debate is about how the government can be better managed within the current high spending framework. The government’s next foray into the debate about assisting the private sector needs to be about where the state will withdraw, not how it can “help” through a range of expensive, centrally-planned initiatives. The IEA and other free-marketeers need to make sure that the discussion in 2011 is precisely framed around “laissez faire” versus “hands-on” government.