Economist Graham Turner gives his assessment of the austerity plans and their wider significance.
George Osborne's spending review does not pull any punches. Page 13 of the document outlines the "scale of the fiscal challenge". He argues that "the spending plans in the 2007 comprehensive spending review were based on unsustainable assumptions about the public finances". It goes on to say that government attempts to tackle the "structural deficit did not begin to take effect until 2010, by which time the impact of the financial crisis had made an unaffordable situation unsustainable".
So the chancellor set the stage for another round of savage cuts to welfare spending. Some departments were spared the axe, including health. But even here there will be cuts. The 27 percent drop in funding (after inflation) for local authorities will reduce care in the community, forcing the NHS to pick up the tab. The "modest" 3.4 percent real cut to education becomes more severe once the projected increase in pupil numbers is considered. Class sizes will rise.
Many of the cuts are perverse. The 15 percent fall in real funding for HM Revenue and Customs (HMRC) comes at a time when the Treasury estimates it failed to collect
£42 billion in taxes last year due to evasion and avoidance. That is more than a quarter of the deficit. The Tax Justice Network argues that the true amount lost is higher still, at about £95 billion. There is little doubt that the coalition government has been leaning on HMRC to go easy on big companies. Vodafone recently saw an outstanding tax bill of £2.2 billion cut to £1.2 billion.
The Department for Business, Innovation and Skills also will see a cut - of 25 percent over the next four years in real terms. This runs contrary to the government rhetoric that business needs to fill the gap left by a shrinking state. It is more of the same "hands-off" free market ideology that led to the debt crisis facing Britain today.
On a very superficial level, Osborne has a point. The deficit is unsustainable. Even after these cuts, interest on the government debt will still rise to £63 billion by 2014-15. That is more than the education budget alone. The failings of the Labour Party when in power provided the Tories with the ammunition they sought to define their election campaign. When the credit crunch sent Britain tumbling into recession in 2008, Osborne was caught on the back foot, lamely defending short sellers (in bank shares) as Northern Rock failed.
The financial crisis erupted under New Labour, but the Tories did not see it coming either. Tony Blair and Gordon Brown presided over policies of free trade and driving down wages which fed directly into the credit bubble - credit growth became the primary driver of economic growth. The subsequent explosion in the budget deficit provided the Tories with an electoral opportunity that was too good to miss, and they seized the chance to redefine the role of the state. They now advocate the same pursuit of profit over wages as a panacea for economic recovery.
It is important not to lose sight of the dangers of this opportunistic attack on public services. The Tories and the Liberal Democrats have no vision for creating a sustainable economic recovery that will lessen the pain of these spending cuts. The credit crunch was not just predicated on the folly of banks. It was also preceded by three decades of de-industrialisation, which led to a surge in Britain's trade deficit and the loss of over 4 million manufacturing jobs. Asset stripping of Britain's industrial base saw wages for many workers stagnate, increasing their dependency on the state - and credit. Cutting welfare in the absence of any coherent strategy to replace these lost jobs threatens the social fabric of communities that have already suffered grievously from "globalisation".
The unwillingness of the coalition government to acknowledge the real source of today's "debt crisis" suggests that the cycle of failure will repeat itself, perhaps sooner than expected. There is a big threat from the looming showdown between the US and China. The current debt crisis was precipitated by subprime borrowing in the US. Today the housing market in the world's largest economy is teetering on the edge, with record arrears and repossessions threatening another run on banks. The US is also lurching violently to the right, with a surge in support for more extreme Republican candidates itching for a fight with China over the scale of its manufacturing exports.
This matters for Britain because, remarkably, Britain's financial "industry" commands a bigger share of the economy than before the credit crunch. The inevitable rupture of the faultlines in the global economy will undermine the recovery in Britain, slow tax revenues and increase spending on unemployment.
On the same day that the government announced its spending review, it also unveiled its latest monthly borrowing report, showing how difficult it will be to get the deficit down in an environment of weak economic growth. The spending reductions announced on 20 October are unlikely to be the end of the cuts. By March next year the chancellor may be forced to go even deeper to preserve his credibility with investors and keep the cheering Tory MPs happy.