The #SpendingReview arithmetic made simple
The Chancellor’s rabbits from the hat were mainly permitted by changes to the economic forecast. In general these were more eye-catching than material, excepting his U-turn on welfare. The OBR continue to stress the severity of the cuts. It is worth looking at how the arithmetic works out – it’s not difficult.
In spite of a bleaker global outlook, UK GDP growth was revised up marginally (0.1 ppt) in 2016 and 2017. At the same time the OBR have changed the way they forecast national insurance and VAT revenues. The sum of the parts are modest gains to government revenues. Call it £5bn a year.
On the ‘spending’ side, the government is also on the receiving end of a windfall of around -£5bn a year, as a result of reduced spending on debt interest payments (following an announcement by the Bank of England clarifying policy around quantitative easing).
That’s around £10 billion a year to play with.
So they have spent this nice increase.
Roughly £9bn a year has gone on departmental spending (£5bn ish), including capital spend (£2bn ish) and undoing the tax credit increase (£2bn ish). On top of this they have increased taxes by around £5bn a year (mainly the apprenticeship levy and stamp duty on buy to let landlords).
FREED UP MONEY: +£10
MINUS INCREASED SPENDING: -9bn
PLUS INCREASED TAXES +5bn
EQUALS: IMPROVEMENT IN BORROWING +£4bn
Hey presto, spending is up and borrowing is down.
As a result of the spending increase they are able to make their boast of the reduced scale of spending cuts, spelled out precisely by the OBR:
As a result the real cut in public services spending over the coming five years now peaks at just over £10 billion in 2019-20, compared to almost £18 billion in July and almost £42 billion (a year earlier) back in March. The plans now imply an average real cut of 1.1 per cent a year over this Parliament, down from 1.6 per cent a year over the last.
These kind of changes are important for political posturing, but they are less important economically and socially. The OBR warn (see their box 3.3):
Barring the periods of demobilisation in the wake of the first and second world wars, this would be the biggest ten-year reduction in the past century (top left panel of Chart A). It would also be the biggest ten-year fall seen in any G7 country in the past half century, according to OECD data dating back to 1960.
Moreover within the aggregate spending limits there are horrendous cuts to local government spend, as the government passes the buck for cuts to local authorities (see here). As discussed elsewhere, boasts about infrastructure spending are pretty hollow (here).
The U-turn on welfare is to be welcomed of course, and (at face value) house building is desperately needed and it’s good to see steps towards an industrial policy. These are all things the TUC has called for. But these are baby steps and the reality remains massive cuts, risks with the economy and serious harm to communities across the country.