Spending Review: an economic overview

The June Spending Round was the latest installment in the government’s deficit reduction programme.  Announced in 2010, it was originally expected to close the (cyclically adjusted) current budget deficit by 2014/15 and result in public sector net debt falling as a percentage of GDP by 2015/16. Slippage in both the deficit targets and projected GDP growth has meant extending austerity measures into the next Parliament.


The aim is that, overall, 20% of the required adjustment to the public finances will be achieved through tax increases and 80% by spending cuts. Current plans imply that, in real terms, total Departmental spending will be around 18% lower in 2017 than 2010. Given that a large chunk of spending (health, overseas aid, schools) is ring-fenced, other departments face cumulative cuts of more than 30% over the period.


This Spending Round was only a small piece of the jig-saw – how the £11.5 billion of current spending cuts already specified for the financial year 2015/16 will be allocated between departments. Again, ring-fencing means that non-protected departments faced a disproportionate burden, an average reduction of over 5% in real terms. The Chancellor also announced how the (much smaller) capital spending budget will be allocated for the year.  Some departments face eye-watering double-digit reductions and a further cumulative 144,000 public sector job losses are in prospect.


Filling-in the details of the already-announced spending envelope for 2015/16 was never going to be a big deal in macro-economic terms. In the overall scheme of things the £11.5bn of spending cuts, two years ahead and out of £750bn-odd total spending, is within any normal forecasting error – but it does highlight how tight the public finances are and will remain through the rest of this Parliament and into the next, when further swingeing spending cuts are penciled in.


And of course even these projections are premised on the economic recovery strengthening from here. While 2013 has got off to a reasonably encouraging start at home, the recovery can hardly be called robust. With fiscal policy ruled out, the onus on keeping it going in an increasingly choppy international and financial market background falls to monetary policy. Welcome, Mr Carney.

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