Some reactions to the spending round

There have been plenty of reactions to yesterday’s spending round and today’s speech from Danny Alexander on infrastructure spending. Here's a few of the best.

City A.M. editor Allister Heath expressed disappointment at the slow rate of public spending decreases, falling by just 2.7 per cent cumulatively in real terms between 2010-11 and 2017-18. The cuts could have gone further, he said, perhaps merging some departments to save on administration costs or cutting subsidies to business for example. Good decisions include the phasing out of automatic pay progression in the public sector and committing just £2bn for investment by the Local Enterprise Partnerships.

The Spectator’s Isabel Hardman perceptively pointed out that the introduction of a seven day waiting period for claiming jobseekers’ allowance would prove divisive, “and perhaps the most likely subject for a wobble or even a U-turn”, as it could hit some of the more desperate. Other dividing lines at the next election could be free schools, pensions and public sector pay.

The welfare changes were also scrutinised by Reform senior researcher Kimberley Trewhitt, who said that while Osborne was right to try and tackle welfare spending, an unwillingness to get on top of spending on pensioners was holding Britain back. With pensioners receiving almost half of all the benefits paid out by the Department for Work and Pensions, the chancellor really needed to address this issue.

Designing a cap, however, is not as simple as it seems. It would be unwise to include the so-called automatic stabilisers – those parts of welfare spending that vary with the economic cycle, like Jobseeker’s Allowance. Osborne announced that the cap would cover tax credits, housing benefit, disability benefits, and pensioner benefits. This last category is of particular importance, as pensioner benefits account for the largest share of social security spending.

Pensioners receive 68 per cent of all benefits paid out by the Department for Work and Pensions (DWP), and 55 per cent of all social security spending (which includes tax credits). But when push came to shove, the chancellor shied away from real reform: he excluded the state pension.

This means that, of all the government spending on pensioner benefits, 70 per cent will not be considered in the cap. This is close to 50 per cent of all benefits paid out by the DWP.

Getting on top of spending on pensioners is not just vital for Britain’s short term financial health, but also reflects long-term pressures. The baby boomers are starting to retire in large numbers, people are living longer and fertility rates are low. Someone entering retirement in 2010 had a one in six chance of spending three decades in retirement. In 2035, the odds of spending 30 years in retirement (taking into account current plans for the state pension age) are one in four. Not only is the state pension growing in cost due to the generous rises guaranteed by the triple lock, but current plans for the state retirement age do not come close to addressing increased longevity.

- See more at: http://www.cityam.com/article/incomplete-cap-welfare-spending-risks-long-term-fiscal-ruin#sthash.e1s9StK4.dpuf

Institute for Fiscal Studies director Paul Johnson criticised the lack of solid information and explanation published, saying that it was not “an exercise in open government”. Once he did do some digging into the detail, he noted “a few little teasers” including changes to the student grant policy (no increases). Johnson noted that the split between spending cuts and tax increases moved away from the 80 per cent cuts 20 per cent tax originally planned to an 85/15 per cent split, and expressed surprise at the lack of outcry over the 144,000 public sector job cuts saying “we seem to have got used to this level of austerity”. Meanwhile, the six year freeze on council taxes was a “major reform to structure of tax system not properly announced or debated”.

Perhaps the biggest shock was yesterday's announcement that from the transport minister that the HS2 budget would be growing from £33bn to £42.6bn – almost as much as the £11.5bn spending cuts the chancellor had just made. Transport minister Patrick McLoughlin said scrapping it would be the “easiest thing in the world for government” but said that the long-term costs of doing so would be huge.

On energy, senior economic adviser at the Institute of Directors Corin Taylor welcomed the commitment to a new nuclear power station at Hinckley Point, but added that the “eventual strike price will need to ensure that nuclear energy is cost-competitive”. Reducing the barriers to shale extraction was also a step in the right direction, says Taylor, adding that "shale gas is the best energy news this country has had in a long time".