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

Photo: Getty
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Who will win the Copeland by-election?

Labour face a tricky task in holding onto the seat. 

Too close to call, neck-and-neck, down to the wire. Pick your cliché for a close-run thing, and that’s what the parties are saying about Copeland.

No governing party has won a seat in a by-election since 1982, and the seat has been Labour-held since 1935, but the circumstances could scarcely be more favourable to the Conservative Party. They are well ahead in the opinion polls and Labour’s electoral coalition is badly split over Brexit.

To add to the discomfort, Jeremy Corbyn, the Labour leader, has a long history of opposing nuclear power, though he has sounded a more supportive note since becoming leader. Sellafield is the main employer there, so regardless of the national picture, that would be an added complication.

Given the competing pressures from the Liberal Democrats on one side and the Conservatives and Ukip on the other, Labour should expect significant erosion in the 42 per cent of the vote they got in 2015. To win, all the Conservatives have to do is tread water. And it's worth noting that so far in this parliament, the results in by-elections have been what you'd expect according to the current state of the parties in the polls - which would mean you'd back Labour to win Stoke but the Tories to win Coepland. 

That Theresa May has visited the seat attests to the closeness. Privately, neither party can be confident of winning. For the Conservatives, that makes it worth putting Theresa May, currently the most popular politician in Britain if the polls are to be believed, into the fray, because what have they got to lose? For the Labour leadership, there is nothing to "win" if they hold a seat in opposition, but there is something to lose if they cannot hold it and Corbyn has visited in the final week. 

What is keeping Labour competitive is the state of the health service in Cumbria. If West Cumberland, the hospital, is closed, then residents will face a two hour drive to the nearest hospital.

The local “success regime” is the cause of significant public opposition. "There are a lot of people who are angry about Jeremy, angry about Trident [the submarines are made nearby]," says one MP, "But they also understand that if they vote Labour they will not be bringing in a government that closes Sellafield but they can send a message about West Cumberland [the hospital that is under threat of closure]."

So Labour have reason to be more cheerful than the bookmakers are concerned. The outcome will come down to what the question that voters are asking when they vote is: if it is nuclear power, the Tories will win. If it is healthcare, Labour will triumph.

In that, May’s visit has probably helped Labour on balance. She could have decisively shifted the contest by making a commitment to keep West Cumberland open and to secure the future of the Moorside nuclear plant. But she did neither, and instead that meant that the local newspaper splashed on her refusal to confirm that the hospital was safe. Which, in a close election, may well be the difference as far as winning and losing are concerned. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.