Britain announces spending cuts that could signal boom or bust

As recently as a week or two ago CSR was essentially only known as the acronym for Corporate Social Responsibility but with the advent of what was deemed the ‘Comprehensive Spending Review’ finally released to the public today in the UK, CSR has suddenly taken on a new and hopefully temporary double meaning. Newswires and twitter accounts are full of stories about how the name has been hijacked and used for very different reasons, concern has spread that CSR will need some time to reassert itself as an acronym for good news and not the dramatic reshaping of one of Europe’s biggest economies.

George Osborne after Wednesday’s speech

Chancellor of the Exchequer George Osborne today announced that the UK government will be unrolling a five-year plan to change and realign the way Britain’s public sector operates. Depending which side of the fence you sit upon reactions are extremely contradictory, though no matter how you feel it can’t be argued that the UK will (for the time being at least) resemble the country it was economically and socially before the announcements. The stock market in the UK showed encouraging signs in the weeks leading up to the release of the spending review, plus some projected slumps today did not occur. The observers and analysts are united in their feeling that the changes will either herald a domino effect within other European countries as they look to cut spending or potentially cause a crisis in confidence that could spark an economic crisis that returns Britain to recessionary conditions perhaps as quickly as before the end of the year. The potential impact in North America will initially be a case of observation by leading parties both in power and those seeking to take over government. What is clear is that the cuts announced today amount to the most radical approach tried by any G-20 nation to try and rein in spending and stabilize the long-term future of the economy. Whether this makes Britain a fascinating guinea pig to watch step backwards or a blueprint for success will play out in the months and years ahead. The reforms are absolutely huge and need a lot of space to even summarise but the government insist that this was the only responsible course of action. Osborne stated:

‘Today’s the day when Britain steps back from the brink, it’s a hard road but will lead to a better future”

Meanwhile the opposition stated that the cuts represented a ‘reckless gamble with people’s livelihoods’. Over the course of the plan half a million public sector jobs will be cut, over 10% of the existing total. Departmental budget cuts will average 19% and both numbers represent the largest cutbacks in over 70 years. Education and healthcare were spared the the most severe of the chopping which in turn impacted other departments to an unprecedented degree. The retirement age was raised to 66 years old beginning in 2020 and social services will bear the brunt of the savings the government foresee. Police budgets were reduced by 20% and social housing by more than 65%, a combination that many fear could backfire in urban areas. Higher education spending will be cut by 40% which was partially the result of elementary education remaining untouched.

In all more than £81bn (US/CA $127) in spending cuts were announced which will make Britain fiscally leaner than at any time in living memory. How well the markets react and jobs return will both help to prove or disprove whether the decision was as prudent as is being represented. The chief economist at KPMG warned that the current sluggish recovery would be damaged by consumers repaying debt, businesses freezing investment and a difficult climate for exports. It’s a fascinating response to an economic situation that did need to change and will be watched closely by other economic powerhouses. The key question being where the private sector can create the jobs needs to safeguard those about to lose their livelihood.