George Osborne’s convenient spending review
George Osborne did the tour of the newsrooms today, announcing that he is a fifth of the way to finding the £11.5 billion worth of savings he is looking for in the upcoming spending review – including the last-minute cuts to departments announced on the eve of the Budget in March.
He has just under month to find the rest of the money amidst squabbles over exactly where the rest of the savings should come from. Iain Duncan Smith today offered to cut his own area of spending, welfare, by £3 billion a year to allow policing and defence to be spared more pain. But with the Lib Dems unlikely to agree to further working-age welfare cuts, and the Government committed to protecting pensioner benefits, George Osborne today ruled out that option. He also ruled out trying to achieve the savings he is looking for from tax and spending on health, schools and international aid.
So in this upcoming spending review, unprotected departments such as the Home Office and Ministry of Justice look set to take the hit. Because the NHS, schools and international aid account for around half of total departmental spending, ring-fencing these areas effectively doubles the cut required from unprotected departments. Hence today’s news that some departments are agreeing to cut of up to 10 per cent in the upcoming review. And many of the these departments are already undergoing the swingeing cuts agreed back in the last spending review in 2010 – with some seeing cuts of around a quarter over the period 2010-2015.
But the savings George Osborne is looking for at the moment only relate to a single year: 2015-16. Huge further cuts are pencilled in for beyond 2015-16 under the Chancellor’s plans – over £25 billion by 2017-18.
So far, the Government has been firm in protecting health, education, aid and pensioner-related benefits. If it wins the next election, it will have a hard time sticking to these priorities and meeting the spending plans it has outlined. If Government wants to continue to protect all of these areas, in the absence of tax rises, unprotected departments will see further budget reductions. In total, across the whole period from 2010 to 2018, departments such as BIS, Home Office and Ministry of Justice could shrink by 38-40 per cent.
It is hard to see how this could happen without a serious impact on public services such as policing and the justice system. The difficulties in making cuts of this magnitude mean that in the next parliament, the Government will have to turn to taxes and benefits to finally mend the hole in the public finances.
The Treasury has previously set out an aim to achieve 80 per cent of the fiscal consolidation from spending cuts and 20 per cent from tax rises – a ratio that it argued was consistent with previous research on the best way of balancing the books. If the 80:20 rule is anything to go by, it is likely the Government will turn some of the planned fiscal consolidation after 2015-16 into unpopular multi-billion pound tax rises at the start of the next parliament.
So far, the government has committed to protecting pensioner benefits. But with these benefits amounting to over half of the total welfare bill, and with cuts already being made to working-age welfare, it is hard to see how this commitment will survive after 2015-16.
The fact that the Spending Review only covers one year is very handy for George Osborne. For now, it may be just about possible to squeeze the savings needed from unprotected departments without breaking any promises, angering the grey vote, confronting the Lib Dems or raising taxes just before an election. But in the next parliament it is going to be much harder to keep everyone happy.
Nida Broughton is Senior Economist at the Social Market Foundation where she co-authored the SMF’s acclaimed assessment of the state of the public finances, ‘Fiscal Fallout’. Nida previously worked at the House of Commons and Ofcom. She has an MA (Cantab) and an MSc in Economics.Tagged in: budget, george osborne, spending review
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