Spending review: Reading through the fine print
An extended coalition, good news for the middle classes, and some unexpected savings: this year's spending review contains a lot more than the highlights chosen by George Osborne for his Commons statement. We've been through the small print to reveal the real picture emerging from the 2015/16 s.
The middle classes will suffer least from Osborne's policy tweaks
"It is not possible to reduce a deficit of this size without asking all sections of the population to play their parts – but those with the broadest shoulders should bear the greatest burden," Osborne declared. "And the Treasury distributional analysis shows that the top fifth of the population lose the most after this spending round."
Take a closer look at that distributional analysis and you'll see the story is slightly more complex. When the public service spending, tax, tax credit and benefit changes are taken into account (ie, everything), the effect on households in 2015/16 is bad news – an average drop of 2.5%. Osborne is correct to say the richest 20% lose the most – they're down four per cent. But the poorest 20% are down 3.9%, virtually the same. And the second poorest quintile are down 2.6%. The biggest winners (that is, the smallest losers) are actually the middle classes, those from 40% to 80% in the income distribution. They're losing out less than the average, seeing losses of 1.2% and just 0.5% respectively.
This coalition is surviving long beyond 2016
No one knew, when the coalition government was formed, exactly how closely the two parties would work together after 2015. Both the Conservatives and Liberal Democrats loudly insisted they would function as completely separate parties in the next general election campaign. The failure of economic growth has eroded that principle, and another big chunk has fallen off it today.
Not only are the Tories and the Lib Dems going to voters with joint spending plans for the first fifth of the next parliament, the two are now presenting joint capital spending proposals for its entirety. "The spending round sets out a long-term plan for capital investment to 2020 and beyond," today's green book announces. It even offers a number: £100 billion is to be spent "over the next parliament". A sizeable amount of cash on which the Tories and the Lib Dems are as one.
The two parties will try their hardest in the next couple of years to persuade voters that they offer genuinely different choices during the next general election campaign. On many policy issues, they will. But not on all. With their united programme for capital investment the clear-cut distinction between the two promised in 2010 has completely disappeared.
Osborne hasn't told you about all his big-ticket savings
In these setpiece Treasury events there are always sneaky little spending decisions which are a million miles away from making it into George Osborne's statement. Two very convenient big-ticket savings leap out this year which have gone a long way towards achieving the chancellor's £11.5 billion target – but were utterly ignored by the chancellor in his statement to parliament.
What Osborne hasn't told you, for example, is that one-third of the extra capital spending is coming from – well – nowhere. In 2014/15 the Office for Budget Responsibility is predicting that the government won't actually spend as much as it was planning to. Its Allowance for Shortfall in Public Sector Investment (it's capped up, so it must be important) predicts a shortfall of a mere £1 billion. So in 2015/16 this extra £1 billion is being added to the total. Very handy.
Then there's the biggest cut to any government department – which is not actually hitting a government department at all. The 'special reserve', used to pay for military costs, came to £1.8 billion in 2014/15 but is falling back to £1 billion in 2015, as Britain's military exits from active duty in Afghanistan. This is a very useful saving for Osborne. It contributes to total managed expenditure (capital and current spending combined) – and the £11.5 billion reduction – but doesn't actually come out of any particular department's budget. Very, very handy indeed.
What Osborne is trying to do is completely unprecedented
The figures say it all: for the past 50 years, public spending has increased by about 3.2% each year from 1956/57 to 2009/10 fiscal years. That is now changing, with the longest period of low or no-growth in public spending since the Second World War. When spending decreased in the past, it usually rose again within two years. "On only a handful of occasions over this period has public spending fallen in real terms – once in the mid-1970s, again in the mid and late-1980s and in the mid-1990s," according to a Commons briefing note. But never for this long.
All this suffering does mean a real prize is in reach, however. Debt is expected to rise by nearly 14% from 71.8% in 2011-12 to 85.6% five years later It is expected to fall, though slightly, by less than one per cent to 84.8% for the 2016-17 budget year. This will be the first decrease in government debt since 2001/02 – slightly more recently than you might expect.