Tough spending decisions tee up more pain still to come

Today’s Spending Round means a number of key non-protected Government departments will see brutal cuts to their total budgets of between roughly one-fifth and over a half between 2010 and 2015. Yet on current plans today’s reductions tee up even steeper falls still to come, according to analysis from the Resolution Foundation. We aren’t yet at the half way point of the austerity era.

The biggest losers are the Communities budget which will see total spending fall from £10.5 billion in 2010-2011 to £4 billion in 2015-16 (in real terms) – a fall of 62 per cent– while the FCO budget will drop from £2.3 billion to £1.1 billion over the same period – a fall of 51 per cent.

Cumulative cuts to other departments will be less severe, but still eye-watering. The Home Office budget will be reduced by more than one quarter (28 per cent), closely followed by BIS (26 per cent), Education (9 per cent) and Transport (7 per cent). Only International Development and Health, whose spending is protected, will see their budgets rise – by 26 per cent and 5 per cent respectively.

Yet the analysis from the Resolution Foundation also reveals that these cuts are a precursor to even greater pain after the 2015 election. On current plans for deficit reduction, further consolidation of around £26 billion would be needed in the two years to 2017-18, over and above what has already been announced. Without further tax rises or welfare cuts this would require departmental cuts to speed up by more than 50 per cent compared to their current pace. Simply keeping departmental cuts to their current pace would require a further £10 billion of tax rises or reductions in welfare spending.

AME cap – a challenge to Universal Credit?

In an attempt to offset future departmental cuts, the Chancellor also today reaffirmed his commitment to a ‘welfare cap’ to cover around £100bn of Annually Managed Expenditure (AME). The government will be required to forecast spending on this portion of AME on a rolling five year basis, starting in the 2014 Budget – as the OBR already does for total AME spending. If this cap is to materially affect government policy, the main impact will fall on Universal Credit, requiring the Work and Pensions Secretary to revise his plans.

Matthew Whittaker, senior economist at the Resolution Foundation, said:

“While today’s cuts will be very painful they’re only a precursor to steeper cuts after the 2015 election if the existing deficit timetable is stuck to. The scale of some of these cuts raises real questions about the deliverability of current plans. Don’t be surprised if this opens up new debates about further tax-rises, and areas of spending like pensioner benefits that have previously been out of bounds.”

“Given mounting pressure on departments, it’s no surprise to hear talk of a welfare cap. In reality the pressure from any cap is likely fall on already hard-hit tax credits and housing benefit. This is likely to have major implications for Ian Duncan Smith’s flagship welfare reform— Universal Credit which is already under enormous pressure.”

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