George Osborne highlights where some of his spending cuts will fall.
George Osborne has a challenge -- to slash the deficit without sending us back into recession. Add in the compromised reality of Coalition politics, and the Chancellor's speech at the Conservative conference in Birmingham on Monday was political Jenga.
Mr. Osborne says he wants to be fair to everyone. His speech seems to have annoyed everyone, so perhaps he's succeeded.
But the political fallout is for him to worry about. Here at the Fool, we're more concerned about what his decisions means for both our own and the nation's finances, and for our investing strategy.
Two benefit bombshells
Osborne's speech showcased two genuinely radical cuts, hitting very different parts of the income spectrum.
- Middle-class households where one of the wage earners is a higher rate taxpayer will no longer be entitled to child benefit.
- Households claiming benefits (except those on disability living allowance) will see them capped to the equivalent of what the average family earns from working (about £26,000 a year).
Restricting child benefit will save about £1 billion a year from the total £12 billion spent on it. No estimate was given as to how much the total benefit cap will save.
The political motivation of being seen to act across the spectrum is clear enough -- even laudable -- but there will be some wince-making headlines at the margins.
For instance, a family with a household income of £80,000 from two wage earners on £40,000 each will still get child benefit, worth a tax-free £2,500-a-year for three children. But a single parent earning £50,000 a year would lose the money entirely.
Gilty pleasures
These controversial cuts are only a foretaste of what's to come in a fortnight, when the Coalition presents its Comprehensive Spending Review.
Osborne cited Britain's £109 billion a year structural deficit, that every £1 in £4 the Government was borrowed, and that we pay £120 million a day on the interest on our debts.
Protecting economic stability and Britain's credit rating has been of paramount importance for the Coalition, he said:
"There is no panic, no daily dread of the bond market, no paralyzing fear that our credit rating could be lost, no immediate danger of a deathly spiral of higher interest rates. Our victory is the very absence of war. Now together we must win the peace."
And it's true that since the Coalition took office, long-term gilt yields have fallen from around 4% to closer to 3%.
But you could argue this reflects global risk aversion or even fears of a double-dip recession more than a ringing endorsement of cuts.
Corporate winners and losers
Osborne was not surprisingly keen to find a positive spin on these imminent spending cuts, devoting a large amount of his speech to emphasizing public sector reform over retrenchment.
The proof will be in the pudding, as will the other half of the income and spending balancing act -- his aspiration to make Britain "open for business". He added that "as economic power shifts east, there's nothing automatic about our prosperity."
The coalition government will therefore:
"Give priority to spending that supports growth in our economy. That means investment in the transport schemes, the medical research, and the communications networks that deliver the greatest economic benefit. It means a green investment bank, and carbon capture and storage, so we reap the financial rewards of a green energy revolution."
It's a risky game to try to predict what listed companies will win -- or at least lose less -- yet it could be a profitable one.
From Osborne's words, you might think companies focused on transport and health could prosper -- Stagecoach (LSE: SGC) and Primary Health Properties (LSE: PHP), say -- and worry more about those reliant on piecemeal public sector income -- such as BT (LSE: BT-A), Mears (LSE: MER), Capita (LSE: CPI) and Logica (LSE: LOG).
But companies such as Capita have already claimed they could be net beneficiaries of the Government offloading public sector responsibilities. Equally, the sheer scale of Government spending in Britain today means few companies will be truly immune from cutbacks.
Barely bashing the bankers
Obviously the best outcome for both the Chancellor and us taxpayers would be for Britain to grow faster to rebalance the books sooner.
To this end, Osborne name-checked some illustrious industrialists from Birmingham's past, such as steam engine pioneers Mathew Bolton and James Watt, and Alexander Parkes, the inventor of plastic:
"Here in this city of innovation, let us find the inspiration to turn today's Britain into an ideas factory for the world. Innovative, ingenious, and open to business."
Osborne said he wants "sustainable" growth to come from across the country, "not from quick fix of debt bubble, or hitching the country's fortunes to the City of London". But he didn't say how this might be achieved.
Indeed, his critics will argue that while he was specific about how he would restrict at benefits, his pledge to curb super-rich bankers' bonuses unless "money is not also flowing out in credit to the small businesses who did nothing to cause this crash and suffered most in it" was high on rhetoric and extremely light on detail.
On the other hand, investors in bank shares won't mind a few political brickbats if at the end of the day the banks are left free to rebuild their businesses (under superior regulation, of course) rather than being broken up for political gain.
Time will tell. Osborne left the stage to the sounds of 'I Won't Back Down' by Tom Petty and the Heartbreakers. At least someone in Conservative Central Office has a sense of what's to come.
More from Owain Bennallack:
> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds and much, much more. Click here to download your reports today!
