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Public spending cuts are not yet halfway through

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Where are we in the spending cuts?

The government is now about halfway through its total planned fiscal consolidation, but only about 40% of the way through its planned cuts to public services spending. No matter who is in power after next year’s election, there are deep cuts still to come.

Looking at the headline numbers, one could be forgiven for thinking that all the fuss about spending cuts was a fuss about nothing.

In the March 2014 budget, total spending was forecast to fall by slightly over 4% between 2010-11 and 2018-19, after adjusting for inflation. But this small fall of headline spending masks huge changes to the underlying components of spending.

Money one use

Source: Alamy

Areas such as debt interest and social security have been allowed to increase, so that total non-departmental spending is forecast to rise in real terms by about 15% between 2010-11 and 2018-19. But because non-departmental spending is such a large proportion of overall spending (about half), this places serious pressure on departmental spending.

Plans in the budget implied that between 2010-11 and 2018-19, on average £1 in every £5 would be withdrawn from departmental budgets. This would be a difficult task.

But even this understates the cuts to some departments. Over the current parliament large areas such as the NHS and schools have been offered protection from the cuts, but that means the cuts have been strongly concentrated on a few unprotected departments.

There are dramatic implications if this protection is continued; if it were carried forward to 2018-19, the cumulative cuts to unprotected departments would increase from £1 in every £5 to £1 in every £3.

These numbers are on the basis of the current government’s plans. But beyond 2015-16 the door is theoretically wide open for a new government to set out a different path for spending.

None of the three main UK parties have set out exactly what they would do. Labour and the Liberal Democrats have both said that they want to borrow no more than they spend on investment.

This would allow them to spend about £26bn more than current government plans by 2018–19, although they may decide not to use the wriggle room. An extra £26bn spent on departments by 2018-19 could make a meaningful difference to the pain ahead, by reducing the real terms cuts beyond 2015-16 to a quarter of the level currently planned.

The Conservative party’s announcements at its party conference left much less room for higher spending. While they suggested that cuts to welfare spending might ease the burden on departments, they also announced some tax cuts that put the pressure back on if the books were still to be balanced.

All three parties have pledged to protect funding for the NHS beyond 2015-16, so whatever cuts to public service spending are yet to come look likely to be focused on the other, unprotected departments.

Over this parliament, the Department for Communities & Local Government has been one of those unprotected departments. Its budget is expected to fall by a staggering 30% between 2010-11 and 2015-16.

Funding from the DCLG only represents part of local authorities’ budgets as they have some powers to raise revenue locally, but they are constrained in how much they can make up for the lost grant revenue.

One could argue the cuts to come won’t be too painful – departments in general seem to have been remarkably successful in implementing cuts so far.

However, the easiest cuts will have been made first, and so further spending cuts will get harder and harder to deliver. Local authorities are required to provide some services by law, and as budgets decrease, these obligations will take up an increasing proportion of their available resources.

The cuts to local government spending implied over this parliament are large.

Exactly how much pain there will be beyond the next election depends on the priorities of the next government and the state of the public finances they inherit. But significant further cuts look likely. If the easier cuts were made first, the ones to come are likely to be more painful.

Soumaya Keynes, research economist, Institute for Fiscal Studies

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