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Spending review 2015: Your Guide

Welcome to our guide to the Spending Review 2015, taking place tomorrow. Here we explain the political context behind the Spending Review and what it is likely to mean for the country's economy. Other coverage includes:

 

The Spending Review: what does it mean?

Tomorrow, the Spending Review will take place. The Spending Review was first introduced by Gordon Brown in 1998 and is intended to give a five-year view of the government's spending plans. It looks at the budgets of all the government departments. In effect, it will decide how £4 trillion of taxpayers' money will be spent by setting the maximum amount that the different departments can spend. This year’s Spending Review will outline how the government will use taxpayers’ money until the 2020 election.

From tomorrow, the Chancellor is planning far deeper cuts than in any other major economy.

The 2015 Spending Review is significant, because it marks the moment at which the British economy will really embrace spending cuts. Despite the Conservatives’ punitive rhetoric about “swingeing cuts” after the 2010 election, the reality is that the worst is yet to come. In February, the IFS released its Green Budget in which it warned that there is “a long way to go” in terms of government spending cuts. From tomorrow, the Chancellor is planning far deeper cuts than in any other major economy. This is unprecedented and will likely have far-reaching consequences for the country.

Government spending is, for accounting purposes, split into two parts: Departmental Expenditure Limits (DEL) and Annually Managed Expenditure (AME). DEL refers to departmental budgets which can be spent on the running of services they oversee such as schools or hospitals, and the everyday cost of resources such as staff. AME is spent on programmes which are demand-led – such as welfare, tax credits or public sector pensions. So for example, AME is higher if more people are unemployed as the welfare bill will rise.

Historically, Spending reviews focus upon DEL only. And tomorrow’s announcements will feature huge cuts for unprotected government departments (i.e. every department except health, schools, international aid and defence – though these have also faced cuts in real terms since 2010). Many of these departments have already made significant cuts since 2010 (the worst being the Department of Communities and Local Government, which has seen cuts of 51%), and the simple fact is there is no longer any fat left. The Spending Review is likely to see these departments being cut to the bone.

But this is also the first Spending Review that will include AME. This is because the Chancellor is keen to reduce welfare expenditure as part of his plan to create a “high wage, low welfare” economy. There are a few snags though: first, the vast majority of welfare spending goes on pensions, which the Chancellor is planning to protect. Second, the National Living Wage introduced earlier this year is not an actual living wage as set by the Living Wage Commission (and will therefore still need to be topped up by benefits), and it does not reflect potential cuts in tax credits which will reduce the income of low and middle earners even further.

The scale of cuts in the Spending Review is a result of the Chancellor wanting to meet a self-imposed arbitrary target, rather than necessity.

The cuts are this deep ultimately because the Conservatives envision the smallest state possible, whose sole role is to administrate the contracting out of services to private providers, and to enact legislation. Part of this vision involves the government running a budget surplus instead of spending money on public services. To that end, the scale of cuts in the Spending Review is a result of the Chancellor wanting to meet a self-imposed arbitrary target, rather than necessity. Remember, too, that official figures show the worst deficit for any October since 2009, so cuts are in fact stalling growth and adding to the deficit.

The Spending Review comes at the same time as northern cities agree regional devolution deals with Westminster as part of the Northern Powerhouse initiative. Not only does the scale of devolved powers and responsibilities not equal devolved budgets, but the Northern Powerhouse will not give cities the chance to increase their incomes by raising taxes. Put simply it will give city-regions the opportunity to decide how to meter out an ever-decreasing pot of money. It’s a wily move by the Chancellor: cut everything to the bone but devolve the blame elsewhere.

This Spending Review takes Britain into unchartered territory.

This Spending Review takes Britain into unchartered territory. It is unlike anything we have seen in modern times, and it is difficult to predict how the country will look by the 2020 election. A peeled-back, virtually non-existent state is likely – with provision for only the most basic of services. The announcements tomorrow may only be debated in political and media circles, but their effects will be felt for a very long time, and by everyone.

 

The view from our experts

Simon Wren-Lewis, Professor of Economic Policy, Oxford University  

Once again the Chancellor is looking to make sharp cuts to public spending in order to meet a target for the government's budget deficit. When he did this in 2010, it delayed the recovery, and lost the average household the equivalent of at least £3,500. Is this a repeat performance?

There are two key differences in the macroeconomic environment this time. First, in 2010 the recovery had hardly begun, and interest rates set by the Bank of England were not able to fall any further to counteract the negative effect of the cuts on demand. Today the recovery is well under way, and the Bank now think interest rates could be cut below the current 0.5%. That means that the macroeconomic risk from austerity today is smaller. But if the world economy takes a turn for the worst, we could be back in 2010 territory.

The second difference is that in 2010 many people did worry that the UK might become like Greece. We now know that this worry was unfounded, and no one seriously thinks that in 2015 there is the potential for a UK government debt funding crisis. However the spending review will cut services that people and firms want, so with no funding crisis why is the Chancellor doing it? The answer is that his new fiscal charter aims to achieve a budget surplus by 2019/20.

I have not found a single economist who has publicly backed Osborne's fiscal charter.

I have not found a single economist who has publicly backed this fiscal charter. It aims to bring the ratio of government debt to GDP down far too quickly. Because nominal GDP is growing, this ratio would still fall if the deficit was less than 3% of GDP. It holds back public investment, when any economist would tell you that investment should be high because interest rates are low. When the Chancellor is at the same time cutting inheritance tax, it becomes clear that his real motive is to shrink the size of the state.

Lisa Nandy MP, Shadow Minister for the Department for Energy and Climate Change

It is likely that the theme of security will feature heavily in tomorrow’s Spending Review. The Chancellor will say he is taking steps to ensure our national and economic security but the government’s approach to energy policy shows how their actions are worsening Britain’s security and moving us to a more dangerous position. 

According to the think tank Green Alliance, the UK’s Department of Energy and Climate Change (Decc) faces cuts of 90% to its staff budgets within three years, threatening the government’s ability to attract the investment we urgently need to secure our power supplies and to insulate homes that are leaking heat and leaving families paying over the odds for their energy. Energy efficiency should be a national infrastructure priority yet budgets have been cut in real terms.

These sudden and severe cuts are putting at risk our energy security.

These sudden and severe cuts are also putting at risk our energy security. National Grid said last month it is already using “last resort” measures to avoid blackouts and next winter the margin between power supply and power demand will be even tighter. Clean energy schemes have already been heavily cut back since the election – solar by almost 90%, and the Green Investment Bank is being sold off despite the role it could play in attracting large scale investment in new power stations. A recent leaked letter from Energy Secretary Amber Rudd revealed further cuts could be made to other clean energy projects such as the scheme designed to bring investment into renewable heat.

The Chancellor will be wielding his axe just days before the climate talks in Paris commence, widely seen as the first opportunity to establish a truly international climate agreement. Yet this should be an urgent security imperative for the UK given the risks, acknowledged by the Governor of the Bank of England, to our long-term economic security resulting from climate change.

With energy policy, as with so many other elements of his fiscal policy, the Chancellor’s actions do not match his words.

David Walker, former director of public reporting at the Audit Commission

Dogma dominates Tory plans for public spending. The cuts are driven by a strong anti-welfare state ideology. But Tory ministers have often also proved strikingly inept; as if they do not quite understand what they are doing, or so dislike the active social state they cannot bring themselves to make it work.

Cameron’s complaints to the Tory leader of Oxfordshire County Council about cuts enforced by his own government make the point.  Social care is in meltdown, annulling Tory bribes for older voters.

George Osborne is cutting off his own fiscal futures.

Now here’s George Osborne cutting off his own fiscal futures. Financial surplus by 2019 (allowing tax cuts timed for the next general election) depends not just on cuts to spending but an enhanced flow of revenue. Getting the money in depends on the effectiveness of the tax collectors and their fight against avoidance and evasion.

Osborne, it’s true, has gone further than Labour ever dared and proposes (tentative) steps against Amazon, Starbucks and multinationals that divert profit from one jurisdiction to another to avoid paying tax. But he has also forced HM Revenue & Customs to cut staff, despite the evidence linking their numbers positively to tax yield.

The latest plan is to close 137 HMRC offices, from East Kilbride to Craigavon, Plymouth to Staines, moving work into 13 regional hubs: 60,000 staff face years of uncertainty; many will lose their jobs.

HMRC is having to adapt, yes, to digitisation. More taxpayers are filing online. But the Osborne Treasury sees success in reduced headcount, and what could be more politically pleasing than cutting tax staff?

Automating taxation won’t necessarily make it more effective. The Commons Public Accounts Committee finds growing taxpayers’ complaints at the dehumanisation of HMRC. In right wing backrooms that might be deemed a welcome goal. But in the short run, it could further reduce HMRC’s capacity to bring the money in – directly affecting Osborne’s political fortune. Contradictions of Conservatism, anyone?

Craig Berry, Deputy Director of SPERI, University of Sheffield

This is the first Spending Review that will include welfare spending as part of its remit. Previous reviews have focused solely on departmental budgets which are less influenced by the labour market. At the risk of feeding the collective hysteria that characterises public perceptions (or prejudices) of welfare spending, benefit cuts have not yet been one of the main contributors to the coalition or Conservative governments’ austerity agenda.

Pensioner spending, which makes up over 40 per cent of the welfare budget, is protected

There are several reasons for this. Firstly, the Conservatives’ longstanding commitment to protect pensioner spending, which makes up over 40 per cent of the apparent welfare budget. Indeed, they are committed to spending far more on pensioners (other things being equal) through the operation of the ‘triple lock’ on the state pension.

Secondly, a large chunk of the welfare bill is made up of things like Child Benefit, which benefits affluent as well as poorer households, and has been largely untouched by the Conservatives in office.

Far more is spent on Child Benefit than, thirdly, Jobseekers’ Allowance (JSA). The government has been unsuccessful in cutting the JSA bill because jobs are relatively plentiful in the UK’s highly flexible labour market for all but the groups with the most significant barriers to formal employment. Indeed, through Universal Credit, the government had actually envisaged spending more, not less, on out-of-work benefits.

Fourthly, much benefit expenditure functions as an ‘automatic stabiliser’. When the economy struggles, the benefits bill goes up, to mitigate the downturn. Tax credits for the working poor have been playing this role since the financial crisis, far more than was originally envisaged, because low pay, rather than high unemployment, has been our principal labour market malfunction.

There have been some cuts, fifthly, to Housing Benefit entitlements but, again, actual spend is dependent on economic conditions – and housing costs have been rising as a direct result of Conservative interventions to inflate the housing market.

But George Osborne clearly feels he has no choice now to do anything other than take an axe to the welfare bill, which means he has no choice but to target the working poor through tax credit cuts (assuming that pensioner protection will remain). If he wavers on his commitment to cutting welfare, then doubts about his insistence that austerity and growth can work in tandem will intensify, jeopardising his long term ideological agenda to reshape the relationship between individuals, market and state.

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