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Budget Cuts: How They Affect Life in the UK

By: Louise Smith, barrister - Updated: 28 Oct 2012 | comments*Discuss
Uk Budget Cuts Poverty Inflation

Public budget and benefit cuts combined with rising prices and a devalued pound are making life difficult for millions of UK residents. The UK government’s austerity programme coincides with record inflation, wide unemployment and a stagnant economy. The Great Depression, also known as the Great Slump, of the 1930s was the UK’s most profound period of economic depression during the 20th century. The current decade could be the 21st Century’s equivalent and is already being described as “The Great Recession”.

Why the UK May Suffer More than Other Countries

As the drop in global trade, budget cuts and a fall in consumer demand take their toll, the UK’s economic recovery is trailing that of its peers. For example, in Italy there is relatively little private debt, whereas in the UK public finance woes are matched by the personal struggles of indebted consumers. The problem is compounded because two thirds of the UK’s GDP is generated by consumer spending. Therefore, increased exports have little positive impact on the economy, no matter how weak the Bank of England (BOE) renders the pound through Quantitative Easing, (or printing money). This is why David Cameron was told off for suggesting that people in the UK pay off their credit cards.

Rocketing Inflation in the UK

It is not encouraging that the BOE has consistently underestimated the issue of inflation over the past five years - and demonstrates ongoing indifference to maintaining price stability. The BOE encouraged the highest rate of debt in UK history, along with the country’s biggest housing bubble, and has responded to the current financial crisis by throwing money at banks. As a result, households are spending more but getting less for their money.

Adjusted for inflation, consumer spending is rapidly shrinking. Across the UK there has been an average 8% rise in rail fares each year. The recent rise in university tuition fees will increase graduate costs by about 200%. UK food inflation persists at over 6%, and is much higher for some items. (The UK imports more of its food than many nations, meaning that higher transport costs and a weak pound have a huge impact on prices.) Energy bills are rising by 15-20% making life very uncomfortable for the most vulnerable members of society.

The BOE and the government argue that inflation has peaked and will fall sharply next year but many price rises, such as tuition fees, are entrenched and unlikely to fall. The fact that the BOE has invested most of its own pension fund in investments that hedge against rising inflation could also be a source of concern.

Impact of Budget Cuts on the Distribution of Income in the UK

A study from the UK’s Institute for Fiscal Studies (IFS): “The Great Recession and the Distribution of Income”, analysed the impact of the financial crisis on 21 countries. It concluded that the economic downturn will "cast a very long shadow in the UK", with the poorest 30% of households suffering the most. The IFS predicts that there will be a squeeze on living standards as earnings fail to keep pace with prices and budget cuts take hold. The study suggests that the UK government’s current budget reduction strategy will result in greater inequality and rising child poverty - reversing progress previously made in these areas.

Professor Stephen Jenkins of the London School of Economics, publisher of the study, said that, whilst the last two years have been relatively easy, the outlook now was "more worrying”. Current UK policies, focused on reduced public spending, may result in big differences in income distribution as compared to other countries.

Future Impact of UK Budget Cuts

Experts warn that the true impact of budget cuts may have been delayed but not avoided. The IFS study says that families with children will be hit hardest by changes in tax and benefits - and that the poorest 10% of households will suffer the most. Already, some working mothers have been forced to give up their jobs because child care has become too expensive without the child benefits which were previously available.

The IFS analysis predicts that child poverty in the UK will rise over the next three years due to government's budget deficit reduction programme. (Child poverty is measured by the percentage of children in households where income is less than 60% of the median for the UK.) Rising child poverty, higher prices and reduced university attendance, together with a lack of incentives for small businesses and investors, are all likely to contribute to a growing sense of disenchantment amongst ordinary UK residents. As a consequence the economic and social outlook for the UK may remain bleak for years to come.

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