Review that reflects political and economic reality

 
George Osborne There are still enormous uncertainties hanging over Mr Osborne's review

Labour says today's spending review is a reflection of the government's "economic failure". To an important extent, that's true - this is a review Mr Osborne has been forced into by the poor performance of the economy.

But, looking at what the chancellor has announced today - and the political environment in which he and everyone else in Westminster is now operating - you would have to say that it is also a reflection of the chancellor's political success.

Think about it: he has now laid out the 6th of what is now likely to be a 7, or 8 year austerity programme. That has slashed the size of many Whitehall departments, in a dire economic environment, and put us on a road to a very different kind of public sector despite the continued high level of borrowing. In future, the government will spend quite a lot on social security, health, defence and education - and not very much else.

The opposition may continue to protest, but the reality is that a majority of the public has accepted both the direction of change - and the broader argument for the austerity that gave rise to it. And Labour has had to accept those things too.

We saw that again when we interviewed Ed Balls today on the special Spending Review programme. He bemoaned the lack of a growth strategy from Mr Osborne. But I did not hear him explicitly reject any of the cuts that have been announced today.

Deep cuts

Don't underestimate the change that those cuts in planned spending represent.

For example, today the Communities Department received another 10% real terms cut in its non-capital spending in 2015-16, on top of the 50% cut it has already seen. Its capital budget has been cut by another 35% in 2015-16 (from £4.8bn to £3.1bn). That's on top of a 74% cut in its capital spending since 2010.

Transport has seen its investment budget increased in 2015-16 - and relatively protected since 2010. But its resource budget is being cut by another 9%, on top of the 21% cut since 2010.

Eric Pickles says he is getting help from other sources, which makes the real cut in local government spending in 2015-16 "only" 2.3%. But there are question marks about where the extra money is coming from. If it comes from handing extra responsibilities to the NHS, critics will say that the NHS has, in fact, faced a real cut (even if the underlying reform to social care makes sense, as many say).

The NHS is only due to get a 0.1% real rise in spending in 2015-16, it wouldn't take much to push it into negative territory. But it will account for a third of public service spending by 2015-16 - up from a quarter in 2010-11. Social security will take a rising share as well, with or without the "cap" Mr Osborne announced today, in large part because of the decision to protect nearly all spending on the over-65s. That promise was only very slightly rescinded today, with the small change to who will get the winter fuel allowance.

Many in Whitehall say it makes sense to exclude the state pension from the so-called "welfare cap". When we interviewed him a few minutes ago, Danny Alexander, the Chief Secretary, said the cap would cover about £100bn - or just under half of the welfare budget.

It's easy to see the politics of a welfare cap - especially one that will be announced just before the election. But from an economic standpoint it's not clear it will make a huge difference.

The IFS director, Paul Johnson, told us this was something that the Treasury could do now, if it wanted to. It will be "cyclically adjusted" - in effect - because the chancellor says highly cyclical spending will not be included. And, it will not include the largest single part of the welfare bill: the state pension.

Nor will the cap itself be legally binding. The OBR will point out when it's breached, and, err, that's it. In that sense, it's no more binding than Mr Osborne's promise to have debt falling as a share of GDP by 2015-16, which was also "policed" by the OBR. We all know what happened to that.

I hope to have more on the issue of automatic pay progression in the civil service later on. Long suffering readers of this blog will remember I banged on about this last autumn.

Back then, lots of civil servants wrote to tell me their departments have not had annual increments for several years. The "tweetback" I got from angry civil servants was quite vociferous on the subject. The Police Confederation say the same. In fact, I haven't been able to find anyone who will own up to getting any of these automatic pay rises since 2010.

That doesn't mean that they are not responsible for some of the surprising upward pay drift in the public sector, despite the formal "freeze". It does make me curious to know how much money the Treasury expects this move to save.

Wild cards

But perhaps the most important point to make about this review is that it's anything but final.

If everything with the economy goes according to plan, George Osborne or his successor will need one, maybe two more years of steep cuts to get rid of his chosen measure of structural borrowing.

But there are two massive wild cards: the bond markets and the OBR's assessment of the economy.

If long-term interest rates keep rising, the chancellor could find himself paying out more in extra debt interest than he has saved with today's cuts. If the OBR take a different view of the long-term state of the economy between now and then - the chancellor might easily need to make even more cuts in 2015-16, or he might not even need to make the real cuts that have been announced today.

Those are the enormous uncertainties hanging over this review. By comparison, the politics seems rather clear - and a lot more favourable to the government than most people would ever have predicted.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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