Cameron: ‘Years of pain ahead’

Saturday, June 5, 2010
By Paul Martin

Jonathan Oliver
June 6, 2010

DAVID CAMERON has warned that the economy is in a far worse state than previously thought and signalled that Britain faces years of “pain” as the spending axe falls.

The prime minister indicated a sharp downgrade in official growth forecasts and revealed that welfare and public sector pay would bear the brunt of budget cuts.

It is understood that tough measures being considered to help control the £156 billion budget deficit include benefit freezes and cuts in child tax credits. There are also likely to be below-inflation pay rises for state employees on top of next year’s planned freeze.

In an interview with The Sunday Times, Cameron said: “Proper statesmanship is taking the right action, explaining to people the purpose behind the pain.”

The prime minister said there would be no “trampoline recovery” of the economy. He warned there was a “serious problem” with forecasts inherited from Labour of robust 3% growth next year.

“There is a huge amount of debt that has got to be dealt with. Crossing our fingers, waiting for growth and hoping it will go away is simply not an answer,” he said.

“The country has got an overdraft. The interest on that overdraft is swallowing up things that the nation should otherwise be spending money on. We have got to take people with us on this difficult journey.”

Cameron gave a clear hint of the priorities for the emergency budget in two weeks’ time.

“You have to address the massive welfare bills,” he said. “You have to address public sector pay bills. You have to address the size of the bureaucracy that has built up over the past decade.

“Otherwise you will have to make reductions across the board which you don’t want to do. We need to address the areas where we have been living beyond our means.”

With the budget of the Department for Work and Pensions set to face cuts of up to 20% over the next five years, ministers are hoping for large savings from schemes to force claimants off incapacity benefit and into work.

More draconian measures are also on the table. Freezing all benefits for 12 months next year would raise £4.1 billion. Executing a Liberal Democrat pledge to axe child credits for couples on a joint income of more than £26,000 could save more than £1 billion a year. It is understood that ministers have ruled out means-testing child benefits and winter fuel payments.

All public sector workers earning more than £18,000 a year already face a pay freeze next year, but it is understood that curbs in wage rises beyond 2011 are likely to be unveiled in the budget on June 22.

Cameron said he had not seen the report being prepared by Sir Alan Budd, the head of the government’s new budget watchdog. MPs expect that Budd will scale down the current growth forecasts to somewhere nearer the average predictions of independent economists, who believe next year’s growth will be a sluggish 2%.

The prime minister insisted the figures that the coalition had inherited were wildly over-optimistic. “There were two levels of optimism in what the [Labour] government was forecasting,” Cameron said. “One was trampoline growth of 3% and above, and the second theory was that interest rates would always stay low.

“One of the most shocking things is the extent of the interest we are paying on our debt. If we don’t do anything about it, it is going to be £50, £60, £70 billion.

“It is going to be huge. We will be spending more on debt interest than we do on educating our children and defending our country. It is totally irresponsible what we are left with.”

Despite the challenge of cutting the deficit, Cameron said he was still confident that most of the gap could be closed by cuts in public spending.

“Sometimes politicians haven’t tried hard enough to reduce inefficient spending and reach for the taxes too quickly,” he said. “We shouldn’t do that.”

However, he refused to rule out an increase in Vat, which many analysts believe will go up from 17.5% to 20%.

“We want expenditure to bear the burden of what needs to be done,” he said.

Cameron signalled a softening of his stance on capital gains tax, which is due to go up this month from 18% to nearly 40% to help pay for the Lib Dem aim of taking the low-paid out of income tax.

Facing a growing rebellion from Tory backbenchers, the prime minister said he was considering some sort of relief for investors selling assets such as shares or second homes that they had held for a long time. “I totally understand the arguments,” Cameron said. “I did not come into politics to punish people who want to do the right thing and save.”

Giving his own gloss on the budget cuts, Nick Clegg, the deputy prime minister and Lib Dem leader, warned there would be no return to the “sink or swim” economics of the Thatcher era. “Fiscal retrenchment does not mean a repeat of the 1980s,” Clegg told The Observer. “We are going to do this differently.”

George Osborne, the chancellor, claimed a significant victory yesterday as the G20 group of leading nations backed the British government’s stance on spending cuts.

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