Tuesday, 15 June 2010

Cuts message has not got through

It seems that many members of the public think that public expenditure cuts will only hit a few background bureaucrats and will have no effect on them, even though the Institute for Fiscal Studies has said that the budgets of some 'unprotected' departments may need to be cut by as much as a third.

Despite warnings by the prime minister that 'every single person' will be affected, more than two out of five respondents to a ComRes survey think that spending cuts will affect them only a little, if at all. Fewer than one in four people, 23 per cent, expected to be affected a lot by the cuts.

One of the worrying aspects of the current situation is that the output gap - which is effectively a measure of the amount of spare capacity in the economy - is smaller than expected. Whilst there is spare capacity in labour, as indicated by the increasing number of people in part-time work, it may not have the necessary skills. There is a concern that some physical capacity has been destroyed for ever by the recesion. This would help to explain why inflation has been so high which may mean that the Bank of England will have to raise interest rates before too long.

The Social Market Foundation has argued that 'universal benefits' would have to go, including paying child benefit and winter fuel payments to the better off. It was always assumed that the social contract that supported the welfare state required that the better off get some benefits from it, but it may be that such universalism is no longer feasible or even required.

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