Cuts will have to keep on coming

 
Allister Heath

There was some good stuff in yesterday’s spending review by the chancellor, as well as some all too predictable disappointments. But first, the big picture, which sadly too few people will focus on. The state is slimming down but only very slowly. Total public spending – everything the British state spends – is expected to have fallen by a cumulative 2.7 per cent in real terms between 2010-11 and 2017-8, a very slow rate of decrease. In cash terms, spending keeps rising, albeit slightly more slowly than inflation: £720.0bn this year, £730.4bn next year, £744.7bn in 2015-16 and so on.

Those were the figures announced earlier this year, and they weren’t changed one iota in yesterday’s announcement. There were no genuinely new, unannounced cuts to overall levels of spending (though given all the spin, you would have been forgiven for thinking otherwise). Of course, these aggregate figures camouflage massive changes within public spending: much more is now spent on interest payments and pensions, for example, and much less on some government departments.

The division in spending between capital investment – which can boost an economy’s productivity when not wasted – and the rest – which is inevitably negatively correlated with GDP and productivity growth over the long-term – hasn’t changed since March either. Public sector gross investment will be £50.4bn in 2015-16; these are exactly the same figures that were announced in March’s fiscal outlook by the Office for Budget Responsibility. This compares to £42.8bn in 2006-07, £46.7bn in 2007-08, £64.6bn in 2008-09, £67.9bn in 2009-10, £58.4bn in 2010-11 and £49.8 in 2011-12, according to the government’s April 2012 budgeting figures.

Gross capex is now pretty stable, though rising slightly, which is not quite the impression Osborne would like us to get: £47.2bn in 2012-13, increasing gradually to £52.1bn by 2017-18, according to the latest OBR stats. This is far from the boom that the Tories claim it to be – but neither is it a bust when compared to Labour’s pre-crisis levels of spending (excluding the figures for 2012-13, which were an aberration).

So what, you might ask, was the point of yesterday’s announcement? It was hugely significant for individual departments. They knew how much Osborne was planning to spend overall, and how much would go on capex – but they didn’t know who would get what. They found out during lengthy negotiations and the final numbers were confirmed yesterday. The overall cuts to departmental budgets are worth £11.5bn.

The Cabinet Office, the Treasury, Justice, Communities and Local Government and Environment, Food and Rural Affairs departments will all lose around a tenth of their budget in 2015-16, compared to 2014-15. Transport will lose 9.3 per cent of its operating resources, but see a 5.5 per cent increase in capital spending on infrastructure such as roads and rail. Health spending is said to be ringfenced. Spending will rise even further on foreign aid, an indefensible, holier than thou decision given what is happening in other areas.

In many of the departments that are being squeezed, the cuts are leading to greater efficiency: for years, under Gordon Brown, departments were showered with money, leading to big pay hikes, a recruitment bonanza, poor procurement and very weak levels of control and efficiency. Plenty of waste and bad management remains, but the situation is gradually improving. But there is no doubt that in other cases the changes will be hugely painful: there will be lots of real suffering.

The problem is that there is no alternative: even these cuts don’t go far enough, with Osborne’s budget deficit plan having stalled and the UK facing huge population ageing-related liabilities. The chancellor could have merged some departments, for example, saving administrative costs; he could have taken an axe to subsidies for business and other vested interest groups; or he could have been even more radical. Instead, he continued with his gradualist policies, exaggerating the extent of his spending reductions and displaying his trademark lack of urgency that is doing so much damage to this country.

The most promising reform announced yesterday was that automatic progression in the public sector would begin to be phased out. This is excellent news: as City A.M. was the first to highlight, average nominal pay in the state sector has continued to rise in a blatant breach of the supposed pay freeze. In fact, average pay in the public sector has continued to go up more quickly in nominal terms than pay in the private sector. While many public sector workers are genuinely seeing their pay frozen, others are being “promoted”, and enjoying higher wages and bonuses, and it is that which is boosting the average figures. My fear is that Osborne’s proposed reforms don’t go far enough and could yet be derailed.

Welfare is also being shaken-up further, with tougher eligibility rules for jobseekers allowance. Claimants will also have to learn English, which makes sense. Pensioners in hot countries will not get the winter fuel payment, a long overdue reform. All of this chimes with the public mood. But the supposedly revolutionary “cap” on overall welfare spending fails to convince: it will include housing benefit, tax credits, disability benefits, and pensioner benefits– but not the state pension. And what will happen if the cap is breached? Nothing. This is purely a political ploy to make the Labour party look soft on spending and welfare ahead of the election.

There were also a number of other good decisions. In an apparent rejection of Lord Heseltine’s latest attempt at turning the UK into a corporatist state, only £2bn will be made available annually for “investment” by Local Enterprise Partnerships. There will be some pooled spending on health and social care, and an extra 180 free schools and 20 technical colleges.

All in all, these are not a bad set of policies, as far as they go and with a handful of exceptions. The real problem is that Osborne is still spending too much and failing to shrink the size of the state sufficiently quickly. His original plan to reduce the budget deficit has failed miserably: it was based far too heavily on tax hikes and the assumption that economic growth would recover, bolstering tax receipts. Regardless of who wins the next election, there will be a need for far greater cuts. Some are still in denial about this, but the simple reality is that Britain’s belt-tightening has barely begun.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath