An end to austerity? Little hope, but more cuts could upend Tory election prospects

Tory cheers during Theresa May’s conference speech when she declared the end of austerity were an audible cry for freedom. The party faithful who attended last week’s annual bash in Birmingham wanted to break the chains of spending cuts that could deny them victory whenever the next general election comes along.

The pain inflicted on much of the population since 2010 has energised voters, prompting many of them to join the Labour party, which staged a dramatic resurgence in 2017 and denied the Tories an outright victory. Another election, especially against a backdrop of even more severe cuts, could spell the end of even that slim majority.

Behind May’s rhetoric was a subtle though important divide between No 10 and the chancellor, Philip Hammond, ahead of next year’s post-Brexit Whitehall spending review.

In his speech, made two days before May’s, Hammond declared that he was going to stick to the austerity path until after Brexit. He added that only if there were a Chequers-style Brexit that boosted the economy would he ease up.

The current Treasury plan puts the UK on a programme of reducing the annual spending deficit – the gap between government income and expenditure – from last year’s 2% of GDP to zero by the middle of the next decade.

The cuts needed to achieve this aim – while honouring May’s pledge to pump £20bn extra into the NHS – will be eye-watering in every other department of state.

Even the health service budget, which is due a 3.4% rise after increases of barely 1% a year since 2010, will find that it is playing catch-up.

And when hospital trust managers combine the backlog of work with the service’s dramatically higher cost inflation rate – linked to new equipment and drugs, and rising demand from an ageing population – it is easy to foresee that deficits will still be making an appearance across the UK.

The toll on welfare recipients is even more severe than the cuts meted out to Whitehall departments. Cuts to disability benefits have been among the most brutal. Such is the hardship inflicted by austerity that the Institute for Fiscal Studies estimates that around half of all households in poverty count a disabled child or disabled adult among their number.

An inflation rate that has hit 3% in the past year and is currently running at 2.7% has played its part. Higher prices in the shops give workers a reason to ask for higher wages, which would lead to higher income tax and national insurance receipts. Higher prices also drive up VAT receipts.

Latest official figures show that from April to August this year, central government received income of £292.8bn, including £219.1bn in taxes, a 4% increase on the same period in 2017. But central government has failed to compensate Whitehall departments for rising prices, which is why between April and August government spending hit £307.1bn, only 2% more than in the same period in 2017.

Hammond’s plan is that this difference, which has already created a huge amount of financial headroom over the more pessimistic forecasts of the Office for Budget Responsibility, will give him a post-Brexit war chest and keep the deficit falling towards zero.

May has taken a different tack. She appears to be considering sticking with something near a 2% annual deficit for the rest of the parliament. This would allow the Treasury to spend around £77bn more than planned and still say that the debt-to-GDP ratio will continue to fall. This is because the government will use nominal GDP growth – the measure that strips out inflation and is currently running at more than 4%.

Around £35bn has already been spent on the NHS, fuel duty and council house building pledges, so the remainder would not be enough to end austerity. The demands for cash across the public sector are too great for that. But in a climate when raising taxes is impossible and further cuts harmful, a little extra borrowing is a prudent way out.

City puts the brakes on Unilever move

Everyone has a plan, said Mike Tyson, until they get punched in the mouth. The directors of Unilever have now learned that lesson. The Anglo-Dutch business giant behind Wall’s ice cream and Dove soap knows all about selling goods to consumers. But it was underprepared for selling to investors its plan to move out of London into a single Rotterdam base, and turn a nine-decade history on its head.

The decision to locate a single HQ and its main share listing in the Netherlands was reached after a year-long consultation. The rationale, Unilever insisted, was logical: corporate structure would be less unwieldy, it would be easier to sell and buy other businesses, and the company would be less vulnerable to a Kraft Heinz-style takeover bid (although Unilever never said this). It also coincided, handily, with beneficial tax changes by the Dutch government (again, Unilever would not say this publicly).

Unilever’s error was to give too little thought to UK investors – its UK-based owners. Clearly, over the 12-month consultation, the likes of Columbia Threadneedle, Legal & General, Schroders, Aviva Investors and M&G – a who’s who of blue-chip City firms – voiced concerns. And these only became louder in the wake of Unilever’s official announcement in March.

These shareholders were worried that, because the move would see Unilever leave the FTSE 100 and their tracker funds mirror the index, they would have to sell their shares, without even the premium they would expect in a takeover. And yet Unilever’s chairman, Marijn Dekkers, and its chief executive, the soon-to-leave Paul Polman, decided to plough on with the plan. They must have known that investor discontent would put the move in danger. And so, in round 12, it proved.

The reign of Dekkers is now surely in doubt.

Ryanair needs a new iconoclast

Long before iconoclasm became the ubiquitous political and social stance that it now is, Ryanair revelled in playing the corporate outsider. It taunted the uptight aviation industry with low fares, gauche marketing and sweary press conferences led by its showman chief executive, Michael O’Leary. But in recent years it has struggled with the consequences of any successful counterculture: it has become the establishment.

From a modest airline that flew a 15-seat aircraft between Waterford and Gatwick in the mid-80s, it is now Europe’s largest short-haul carrier, flying 130 million people a year around Europe. Ryanair can no longer play the upstart. And it is paying the price.

It issued a profit warning last week as it blamed the impact of higher oil prices and coordinated pilot and cabin-crew strikes across Europe. The former hits every airline, but the latter is caused by Ryanair’s growth outstripping its approach to industrial relations.

O’Leary dropped his avowedly anti-union stance late last year when he said he would start accepting collective bargaining. But this was too late to heal a workforce relationship that in some areas had become dysfunctional. In his race for revenues, O’Leary had neglected to realise that working your staff hard might bring commercial success, but the company will come unstuck if it does not share the proceeds.

Traditional airlines that were caught flat-footed by the likes of Ryanair and easyJet have learned their lessons: BA has scrapped free food on short-haul flights; baggage charges are the norm; and many full-service airlines have launched low-cost subsidiaries. And, of course, they unionised decades ago.

O’Leary said last month that he would prefer to sign a short-term contract when his current five-year deal expires next year. Having transformed the industry, he and his shareholders should consider whether it is time for a new chief iconoclast.

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