Austerity after 2015: why the worst is yet to come

Without further welfare cuts or tax rises, the next government will have to cut departmental spending 50% faster.

With a week to go before the Spending Review, reports suggest that the Treasury has secured just a third of the £11.5bn of cuts planned in 2015-16. Yet amid the claim and counter-claim about how far departmental budgets can be squeezed, it is worth reflecting on how the review fits into the broader context of deficit reduction. If current plans are to be delivered, this round of cuts is merely an hors d'oeuvre for a far more painful set of decisions to be made after the next election.

New analysis by the Resolution Foundation shows that departments are already expected to be some 9% smaller on average in 2014-15 than in 2010-11 as a result of cuts in the 2010 Spending Review. With spending on health, schools and overseas aid protected, these have been far starker for some departments. At the extreme, the Foreign Office will be just half of its previous size, while the communities department will have shrunk by more than two-fifths. More typically, the defence budget will have fallen by 17%, while the Home Office will have suffered a 25% cut.

Not surprising, then, that the 2.6% of additional savings called for in 2015-16 are proving hard to find. With health, schools and overseas aid once again protected, the government’s plans imply average cuts of 8% across all other departments. With every additional pound of savings harder to identify than the last, don’t be surprised if the Chancellor decides to raise extra revenue from further welfare cuts.

Yet the new analysis also shows that - if the current deficit reduction timetable is adhered to — there’s (much) more to come. Painful though the current process is, existing plans imply a further £26bn of cuts between 2016 and 2018. This would mean either accelerating the pace of departmental cuts or introducing major new welfare cuts or tax rises. As tough as 2015-16 may be, this year’s Spending Review would merely be the calm in the eye of the storm.

What does this mean in practice for the years after 2015? Delivering the current plans without further welfare cuts or tax rises would imply speeding up departmental cuts by 50%. If health, schools and aid spending is again protected, that would imply cumulative cuts to unprotected departments by 2017-18 that begin to look implausible. Defence and the Home Office would be between one-third and one-half smaller than in 2010-11. The Foreign Office would be two-thirds smaller than it was seven years before.

This scenario would have profound implications for the role and shape of the state. Total departmental spending would have fallen 18% between 2010-11 and 17-18. Within that total, the proportion going to health would have increased from one-quarter to one-third, while spending on defence would have fallen from 10% to 8%.

Of course, the government could decide to ease post-2015-16 departmental cuts by seeking more from welfare or tax. Yet our new analysis reveals that simply keeping post-election departmental cuts to their current pace will require an extra £10bn from welfare or tax over two years. For a sense of scale, this is the equivalent of finding more in two years than will be cut from the tax credit budget in seven (£9bn). Alternatively, it would mean raising VAT from 20% to 21%. Hardly options that will help to ease the decade-long squeeze on living standards.

In reality, any post-2015 government would be likely to adopt a combination of measures. In particular, we can expect to hear more in the coming weeks and months about a potential cap on ‘structural’ aspects of Annually Managed Expenditure (AME). While both the government and the opposition have declared an intention to grapple with these aspects of spending, practical and political constraints mean their options are limited. Once we rule out the non-welfare parts of AME (e.g. debt interest payments) and politically-sensitive benefits (the state pension) that leaves less than one-third to work with. Within this envelope, housing benefit, tax credits and the employment and support allowance would appear to be in line for cuts. Determining which aspects of such payments are structural and which are cyclical will be a difficult task.

Finally, we might expect calls for cuts in pensioner benefits to intensify. Under current plans, the proportion of welfare spending accounted for by the State Pension and associated benefits is set to increase from 42% in 2010-11 to 48% in 2017-18. The government’s ‘triple lock’ means that this is a product not just of demographics, but of increased generosity per pensioner. Average pensioner payments are set to increase by 6% over the period at the same time as average working-age support declines by 15%.

Of course, we shouldn’t forget that all of these numbers depend heavily on deeply uncertain estimates of the output gap, a figure that has been revised dramatically in the past and may well be revised again. But it’s difficult to see past the likelihood that the post-election period will bring with it a new suite of difficult choices, from departmental cuts that look increasingly hard to deliver to further cuts to working-age support or the introduction of unannounced tax rises. Ultimately, we might be looking at further slippage in the deficit-reduction timetable. Don’t rule out the chance of it being all four.

Matthew Whittaker is senior economist at the Resolution Foundation

George Osborne during a visit to a branch of Lloyds bank on June 19, 2013 in London. Photograph: Getty Images.

Matthew Whittaker is senior economist at the Resolution Foundation

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The private renting sector enables racist landlords like Fergus Wilson

A Kent landlord tried to ban "coloured people" from his properties. 

Fergus Wilson, a landlord in Kent, has made headlines after The Sun published his email to a letting agent which included the line: "No coloured people because of the curry smell at the end of the tenancy."

When confronted, the 70-year-old property owner only responded with the claim "we're getting overloaded with coloured people". The letting agents said they would not carry out his orders, which were illegal. 

The combination of blatant racism, a tired stereotype and the outdated language may make Wilson seem suspiciously like a Time Landlord who has somehow slipped in from 1974. But unfortunately he is more modern than he seems.

Back in 2013, a BBC undercover investigation found 10 letting agent firms willing to discriminate against black tenants at the landlord's request. One manager was filmed saying: "99% of my landlords don't want Afro-Caribbeans."

Under the Equality Act 2010, this is illegal. But the conditions of the private renting sector allow discrimination to flourish like mould on a damp wall. 

First, discrimination is common in flat shares. While housemates or live-in landlords cannot turn away a prospective tenant because of their race, they can express preferences of gender and ethnicity. There can be logical reasons for this - but it also provides useful cover for bigots. When one flat hunter in London protested about being asked "where do your parents come from?", the landlord claimed he just wanted to know whether she was Christian.

Second, the private rental sector is about as transparent as a landlord's tax arrangements. A friend of mine, a young professional Indian immigrant, enthusiastically replied to house share ads in the hope of meeting people from other cultures. After a month of responding to three or four room ads a day, he'd had just six responses. He ended up sharing with other Indian immigrants.

My friend suspected he'd been discriminated against, but he had no way of proving it. There is no centrally held data on who flatshares with who (the closest proxy is SpareRoom, but its data is limited to room ads). 

Third, the current private renting trends suggest discrimination will increase, rather than decrease. Landlords hiked rents by 2.1 per cent in the 12 months to February 2017, according to the Office for National Statistics, an indication of high demand. SpareRoom has recorded as many as 22 flat hunters chasing a single room. In this frenzy, it only becomes harder for prospective tenants to question the assertion "it's already taken". 

Alongside this demand, the government has introduced legislation which requires landlords to check that tenants can legitimately stay in the UK. A report this year by the Joint Council for the Welfare of Immigrants found that half of landlords were less likely to rent to foreign nationals as a result of the scheme. This also provides handy cover for the BTL bigot - when a black British tenant without a passport asked about a room, 58 per cent of landlords ignored the request or turned it down

Of course, plenty of landlords are open-minded, unbiased and unlikely to make a tabloid headline anytime soon. They most likely outnumber the Fergus Wilsons of this world. But without any way of monitoring discrimination in the private rental sector, it's impossible to know for sure. 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.