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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Donald Trump vs Barack Obama: How the inauguration speeches compared

We compared the two presidents on trade, foreign affairs and climate change – so you (really, really) don't have to.

After watching Donald Trump's inaugural address, what better way to get rid of the last few dregs of hope than by comparing what he said with Barack Obama's address from 2009? 

Both thanked the previous President, with Trump calling the Obamas "magnificent", and pledged to reform Washington, but the comparison ended there. 

Here is what each of them said: 

On American jobs

Obama:

The state of our economy calls for action, bold and swift.  And we will act, not only to create new jobs, but to lay a new foundation for growth.  We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.  We'll restore science to its rightful place, and wield technology's wonders to raise health care's quality and lower its cost.  We will harness the sun and the winds and the soil to fuel our cars and run our factories.  And we will transform our schools and colleges and universities to meet the demands of a new age.

Trump:

For many decades we've enriched foreign industry at the expense of American industry, subsidized the armies of other countries while allowing for the very sad depletion of our military.

One by one, the factories shuttered and left our shores with not even a thought about the millions and millions of American workers that were left behind.

Obama had a plan for growth. Trump just blames the rest of the world...

On global warming

Obama:

With old friends and former foes, we'll work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet.

Trump:

On the Middle East:

Obama:

To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society's ills on the West, know that your people will judge you on what you can build, not what you destroy. 

Trump:

We will re-enforce old alliances and form new ones and unite the civilized world against radical Islamic terrorism, which we will eradicate completely from the face of the earth.

On “greatness”

Obama:

In reaffirming the greatness of our nation we understand that greatness is never a given. It must be earned.

Trump:

America will start winning again, winning like never before.

 

On trade

Obama:

This is the journey we continue today.  We remain the most prosperous, powerful nation on Earth.  Our workers are no less productive than when this crisis began.  Our minds are no less inventive, our goods and services no less needed than they were last week, or last month, or last year.  Our capacity remains undiminished.  

Trump:

We must protect our borders from the ravages of other countries making our product, stealing our companies and destroying our jobs.

Protection will lead to great prosperity and strength. I will fight for you with every breath in my body, and I will never ever let you down.

Stephanie Boland is digital assistant at the New Statesman. She tweets at @stephanieboland