Iain Cairns, Phd student and researcher with Common Weal, analyses George Osborne’s spending review
ONE could have been forgiven for thinking that George was in serious trouble before today’s spending review. The chancellor had committed to cut PS12 billion from the welfare budget plus PS20 billion from elsewhere which, together with measures to tackle tax avoidance, Government projections have indicated would deliver a PS10 billion surplus by 2020-2021, just in time for the announcement of tax-cuts before the next UK general election.
But the planned cutbacks had been made harder in recent weeks because of two unforeseen events. Firstly, after the Paris attacks commitments to a PS12 billion increase in military spending are, at this stage, difficult to wriggle out of. A problem is that this new PS12 billion is not new money at all; the idea was that it will be redirected from spending elsewhere; it had been suggested from savings on welfare, business assistance and, bizarrely given the role of the police in providing the real front line against terrorist threats in Paris and elsewhere, the police force.
In other words this commitment increases the pressure on spending elsewhere in the budget. The second unforeseen event was defeat of the Government’s reform of tax credits in the House of Lords. Since then Osborne has been under pressure to lessen the blow of the withdrawal of tax credits on the poorest victims of the reforms. Adding to his woes, worse than expected deficit figures, the worst for six years, announced by the Office for National Statistics in October, threatened to undermine Osborne’s whole deficit cutting strategy.
So what would he do? Soften his reform of tax credits? But then how to find the PS4.5 billion projected savings from elsewhere? Perhaps by targeting housing benefit? But wouldn’t this hit the same people as tax credit withdrawal? Make deeper cuts elsewhere, perhaps in police services? But wouldn’t that create the possibility of further unforeseen economic and political consequences? What about having a less ambitious target for a surplus for 2020-2021?
“As luck would have it the Office for Budget Responsibility (OBR) came riding to the rescue. Osborne announced early in his speech that the OBR had recalculated the nation’s finances and found them to be healthier than at the time of the summer budget, to the sum of PS27 billion.”
But as luck would have it the Office for Budget Responsibility (OBR) came riding to the rescue. Osborne announced early in his speech that the OBR had recalculated the nation’s finances and found them to be healthier than at the time of the summer budget, to the sum of PS27 billion; difficult to explain considering the October ONS figures.
He then proceeded to scrap the cuts to tax credits. Putting aside that the introduction of Universal Credit will mean that families are as worse off by 2020 anyway, this was a major U-turn for Osborne and will no doubt get all of the headlines.
Cuts to housing benefit were also largely down played – it had been suggested that he might make tenants pay 20 per cent of rents. Instead there were caps on housing benefit, withdrawal of housing benefit and pension credit payments for those who are out of the UK for more than a month and a 14 per cent reduction in the budget of the Department of Work and Pensions.
Nonetheless he announced that the planned PS12 billion in welfare cuts will be delivered in full. How this adds up is anyone’s guess. Osborne also announced that police spending would be protected in cash terms, with military spend up as announced previously. Similarly protected, the Chancellor announced, were pensions, schools and the NHS.
So if the cuts are less ambitious, did the Chancellor also have to concede a less ambitious deficit reduction target? No, the projection is still a PS10 billion surplus by the next election. How will this be achieved? Well, there were some significant and painful cuts. Business department funding is to be cut by 17 per cent; local authority spending, in cash terms, is to be same in 2020 as 2015, so a real terms cut. But largely there was talk of “efficiency savings” in various departments. But this reeks of political dishonesty as it doesn’t tell us exactly how savings will be made.
“You can’t guide an economy to prosperity by slashing the income of countless citizens and throwing innumerable workers on the scrapheap; the less successful Osborne is in actioning cutbacks the more successful he may be in balancing the books.”
So the Chancellor is still on target on his deficit reduction programme without making any of the key cuts many commentators predicted would be made today. How is this possible? Part of the answer might be that cutbacks do not necessarily result in deficit reductions.
After a disastrous start following the last spending review in 2010, when his cutbacks tanked the economy, an inability to go on to cut as much as Osborne desired created breathing space for the economy to grow, with a resulting relative improvement in the UK’s finances. Because you can’t guide an economy to prosperity by slashing the income of countless citizens and throwing innumerable workers on the scrapheap; the less successful Osborne is in actioning cutbacks the more successful he may be in balancing the books.
Yet the Chancellor also announced that state spending is to be reduced from the 45 per cent of output in 2010, the OECD average, to 36.5 per cent in 2020. Such a drop, if it were to be achieved, constitutes a massive reshaping of British society. What this tells us is that the spending review was little more than a piece of political theatre. It was a sleight of hand. We are to be told that spending is to be maintained, core services protected, appropriate investment to be made in growing the economy, while all the while the public realm in the UK is to be quietly dismantled behind closed doors and away from the scrutiny of the despatch box.