The spending state we're in

spending cuts protest Image copyright Getty Images

It's time to talk about the state, as a historic shift in government spending emphasises the National Health Service and older people's benefits at the expense of quite a lot else.

That's the message from people who crunch the fiscal numbers, arguing there are fundamental changes under way, but not much public understanding of them.

So are we any closer to confronting these new realities, after the main three UK parties conferred over recent weeks, and the next draft budget was published by the Scottish government?

Er, not much. The Conservatives' George Osborne wanted to sound tough on public spending. But what he wasn't telling us was that his £25bn in cuts - only a small part of which he detailed - is a long way short of the scale of the challenge. The structural deficit (the bit that remains even once the economy recovers) still looks like £70bn.

Labour wants to cut the deficit too, but more slowly, using tax rises as well as spending cuts. And the Liberal Democrats want to put another £1bn into the NHS. That's around £29bn short of the extra funding that it's claimed is needed by 2021 for the English NHS alone.

And did Scottish independence offer a 'Get Out of Austerity Free' card? Far from it, of which more later.

Tax giveaways

Some of these harsh realities about the state of UK public spending were set out at the party conferences in Manchester, Birmingham and Glasgow by the combined efforts of the Institute of Fiscal Studies (IFS) and the Chartered Institute of Taxation (CIOT).

I was at their fringe meeting with the Lib Dems on Clydeside, to see a characteristically cheerful demolition of the hopes for an end to the fiscal squeeze from the IFS's director, Paul Johnson.

You can see his charts here.

But to save you time, here's a summary of some key points.

We're only half way through the squeeze required to get the deficit under control, when measured as a share of national output. Just over 5% so far. Just over 10% required. And by far the largest part pencilled in for the rest of this decade is in spending cuts.

We've seen most of the proposed tax increases already applied, starting with the rise in VAT to 20%. Indeed, contrary to austerity Britain, it was pointed out we've seen some very significant tax CUTS over recent years. If you include the rise in the income tax threshold to more than £10,000, repeated cuts in the corporation tax rate, and a freeze on petrol duty, it adds up to a whopping £20bn.

Back to 2004

Paul Johnson went on to point out that we're not looking at a historic high in tax take as a proportion of national output. It's been and remains fairly steady. Nor is all the talk of austerity because government's share of national output is being slashed to historic lows.

If the current plans are actually implemented, it would merely get the share of national income spent by the government back to the levels seen in the middle of the Blair-Brown Labour government. That was as they hit the spending accelerator and the economy crashed into the banking crisis.

So why worry? Life around 2004 wasn't so bad, was it? Well, that's where the changing shape of government spending comes in.

Total spending doesn't look so bad. It's down a modest 4% between 2010-11 and 2018-19. That's before you factor in the impact of paying more for a much larger debt. Once that's factored in, spending falls 8%.

Unpleasant choices

During that period, with demographic change, the cost of pensions is up 11%, as part of welfare, in total rising 7%. Once that's factored in, the impact on the remainder of public spending is 14%.

For spending departments, after paying public sector pensions, the squeeze looks like 20%. But what if you continue to protect the budgets for the NHS, for schools and for international aid, as the coalition government has been doing? If you do all three, the other departments have to take a cut of 36%.

Think about that a moment - a reduction of more than a third across much of local government provision, support for communities, police and prisons, defence, transport and so on.

Under those projections, the IFS says spending on public services is on track to be at its lowest since at least 1948.

And that cut in spending is one of "four unpleasant choices" set out by the IFS. The others are b) going a bit easier on public service cuts but cutting much more harshly at welfare and spending: c) easing back on the deficit-reduction now, but with much more to do later: or d) big increases in taxation (with a consequent threat to economic growth).

Future generations

Not to tackle the deficit is to leave more debt to future generations to sort out. That's younger people who are already facing daunting costs of education, housing and raising families. They may justifiably wonder why today's pensioners deserve to have their benefits protected amid the spending pressures elsewhere.

And here's another nasty factor. All this supposes the recovery from the Great Crunch continues. Growth has been impressive in recent quarters, but the most recent data suggests a global slowdown could hit UK growth as well.

Before it does, tax receipts are already coming in below expectations. Why? According to the CIOT president Anne Fairpo, it seems the fast-rising number of self-employed workers are responsible - not because they're unwilling to pay their dues, but because they're typically taking home half the pay of a fully-employed person. The self-employed are less likely to be skilled professionals, as in the past, and more likely to be low-paid service workers.

Holyrood headaches

Were any of these fiscal choices avoidable if Scotland had voted for independence? Well, the Scottish government's proposition was that a couple of billion extra borrowing for capital investment could cushion the impact of austerity over the rest of the decade.

Scottish ministers toyed with the idea of repudiating any commitment to UK debt, and would dearly love to repudiate the cost of nuclear weapons.

But a number of other factors looked like adding to Holyrood's spending headaches, including transition (never properly priced) and the likelihood of higher government borrowing costs.

It may have been that Scottish independence could get past short-term pain to get onto a faster growth path in the longer term. The plan for that was far from simple.

Holyrood could also - and may yet - use taxation powers to redistribute for greater social justice. That's the thinking behind changes to the home transactions tax announced on Thursday.

But for this decade at least, it's hard to see any of the choices bearing down on Westminster's spending that wouldn't also have caught up with an independent Holyrood.

As the debate over independence continues, the choice between 'No' and 'Yes' last month has been characterised by some as a choice between continued austerity and an end to all that. To put it politely, that's a bit naive.