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 Images
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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.