George Osborne must learn from Europe's austerity23 November 2011
The eurozone crisis continues to dominate the headlines as the Chancellor prepares for his Autumn Statement next week. What is so interesting for the UK is that the Continental debate is now moving onto our big challenge i.e. how to eliminate the national deficit in one Parliament.
As the Prime Minister told the CBI on Monday, reducing the deficit is “line one, clause one and part one” of the Government's strategy for business and "everything else is extra". But as we learnt on Tuesday, George Osborne is at least one year behind schedule. Last year’s Spending Review was supposed to compress a whole Parliament’s argument and negotiation into just five months. In fact something more will be needed.
The eurozone is pointing the way. The last week has seen the creation of new governments in Italy and Spain and major new proposals by Francois Hollande, the opponent of Nicolas Sarkozy in the French presidential campaign next year.
Francois Hollande proposes a reduction in government subsidies to the French health system, with the effect of increasing charges for visiting the doctor (as Ireland has done already). Italy is also cutting the health budget and Spain is very likely to. France, Spain and Greece are increasing their retirement age. Spain and Greece are making actual cuts to public sector salaries, up to 30 per cent in some cases. France, Italy and Greece are replacing only a fraction of the public sector workers that leave through retirement and other natural wastage. The new Spanish Government was elected on a manifesto to introduce performance-related pay across the public sector.
These countries remind us that the big costs of government are the same in all developed countries i.e. pensions, healthcare and the public sector workforce. They also show that despite the political sensitivity, Ministers are going to have to return to these budgets and services until they are sustainable.
The UK is clearly ahead of some countries in regard to the retirement age. The UK pension age is rising to 68 compared to only 62 in France, for example. But our debate on the health service is well behind. Other countries routinely involve the private sector in the delivery of taxpayer-funded healthcare, with the benefit of greater efficiency. They ask citizens for a small payment to see a doctor, to make sure that the service is not abused. The UK is instinctively nervous of both of these ideas, and the Coalition Government has been unwilling to lead public opinion. This is the biggest hole in George Osborne’s deficit reduction plans.
Before the election, some Conservatives hoped that Britain’s austerity would last for about two years. As a senior Conservative told Benedict Brogan: "The plan is tax cuts in the third year of the Parliament.” In fact it was always the case that austerity would be a two-term project. It is leading our neighbours to confront the most deep-rooted problems in their economies, and it will do so in the UK too.
Andrew Haldenby is director of the independent think tank Reform. Its report The long game: increasing UK economic growth was published yesterday.