Taking the axe to pension benefits rather than jobs, and cutting bureaucracy rather than infrastructure investment, are what Britain's austerity drive should focus on to render the smallest hit to economic growth. If finance minister George Osborne is to achieve the 83 billion pounds ($133 billion) of spending cuts he promised in his June budget some degree of economic pain is inevitable. But economists say how hard Britain's growth potential is hit will ultimately depend not just on the figures but also the profile of the cuts: how they are spread and how much of the burden is borne by the welfare state. Judging by the drip-feed of announcements ahead of next week's Comprehensive Spending Review, Britain's five-month-old coalition government has taken heed. In the past two weeks it has announced cuts to pension tax relief, a cull of publicly-funded regulatory bodies and the end of universal child benefit payments. Those measures indicate a direction of travel they represent only a small part of the overall austerity programme. Although Wednesday's statement will not detail every project that has been pared or abandoned, it will shape views on how likely the government is to achieve its debt-cutting goals and whether recovery will be blown off course in the process. For each pound spent, different areas of government expenditure have a different impact on GDP growth – something economists know as the domestic multiplier effect. These calculations are theoretical but they throw up some interesting thoughts on what an “ideal” austerity package should look like, at least from the point of view of GDP growth. Construction projects, which tend to be labour intensive and require few imports, score highly on the multiplier scorecard. The same goes for infrastructure investment, which has the added benefit of improving productivity. Britain's independent Office for Budget Responsibility estimates every pound of capital spending by the government boosts gross domestic product by exactly that amount, while every pound spent on welfare generates just 60 pence. When it comes to the public sector payroll, savings from pensions and wage restraint are far less damaging to an economy's growth potential than job cuts which often result in costly redundancy payments and a higher welfare bill. “If I had to give two recommendations it would be not to cut capital spending so much and to try to find ways of minimizing public sector jobs losses,” said John Hawskworth, head of macroeconomics at consultancy PWC.
