Annually Managed Expenditure: a bang or a whimper?
One of the more opaque passages in George Osborne’s speech was addressed to Annually Managed Expenditure. After a reference to “tackling the growth of spending of welfare budgets” he added:
We will now introduce a new limit on a significant proportion of Annually Managed Expenditure. It will be set out in a way that allows the automatic stabilisers to operate – but will bring real control to areas of public spending that had been out of control.
What does this mean? Government spending is divided into two types: Departmental Expenditure Limits (DEL) are fixed budgets covering several years and Annually Managed Expenditure (AME) is made up of items that can’t be planned ahead in this way.
By far the biggest item of AME expenditure is the social security budget. This is reasonable – we don’t know how many disabled or unemployed people there are going to be in two years’ time, for instance – but the Treasury has never liked it.
The Budget Report has a paragraph that sheds a little light on the Chancellor’s obscure declaration:
Budget 2013 announces that the Government will strengthen the spending framework by introducing a firm limit on a significant proportion of AME, including areas of welfare expenditure. This will be designed in a way that allows the automatic stabilisers to operate to support the economy.
What could they mean? Well, simply applying a cash limit to benefit budgets and waiting for them to run out half way through the year isn’t very likely. It is more likely that the government wants to stop benefit increases being automatically linked to inflation even with a 1 per cent limit and instead make decisions about benefit rates subject to the spending negotiations within government.
But it would be difficult to do this in a way that would affect a large proportion of benefit spending, which is what Mr Osborne hinted. First of all there’s his commitment to maintaining the automatic stabilisers. The point about the automatic stabilisers is that they are automatic – i.e. not planned: as times get tougher they expand automatically.
If we exclude benefits for unemployed people and other benefits that are affected by the economic cycle, the obvious large contender for control would be Retirement Pension. This would be incredibly brave, but the government has shown no inclination to ‘control spending’ on senior citizens. (Quite right too, an instance where political expediency and ethics point in the same direction.)
This is not the first time the Treasury has tried to do something about controlling AME expenditure. In the 2011 Budget the Chancellor announced that he was “considering options for strengthening control over AME by increasing the amount of spending that is managed within fixed budgets. This will improve incentives to manage AME, in particular social security spending which is the most significant component. Further detail will be set out by the summer.” (Hat Tip: @ianmulheirn)
In this case summer never came, though the Treasury did eventually announce stronger processes for monitoring and managing social security spending, with increases requiring “Treasury approval, and … a discussion of what steps can be taken to offset these increases.”
The Government plainly wants to hold back social security spending, probably doing something further about cost-of-living increases. They’ve already achieved substantial cuts by this approach, for comparatively little political pain, so this may well seem like a great idea to them. The difficulty is that the two main areas of social security spending that could yield substantial savings from this sort of control are likely to be ruled out.
The Chancellor promised more detail of his plans in the Spending Review, but I’m not holding my breath.