Three things to bear in mind when watching Osborne today
Why everyone’s pretty much making it up.
1. Most of today’s cuts were decided three years ago In his statement today, the Chancellor needs to find cuts in most unprotected departments of around 8-9 per cent. That number flows mainly from three things: the pace of deficit reduction; the decision to protect health, schools, international development and pensioners; and forecasts for so-called Annually Managed Expenditure (AME). All three are either old news or else significantly beyond Osborne’s direct control. That’s not to say that today’s decisions don’t matter. Some departments will get more or less than 8-9 per cent—if briefings are right, local government will lose 10 per cent, meaning fewer cuts elsewhere. But these are relatively small movements around a big number that flows from existing plans.
2. Today’s cuts will hurt but things are set to get tougher The Chancellor will be pleased at the lack of blood on Whitehall carpets today. Tough settlements have been reached and coalition relationships have held up well. Even with no extra benefit cuts being announced in his statement, Osborne has also succeeded in baking in a tough settlement on welfare.
Yet the cuts needed to finish the job in 2016-17 and 2017-18 will mean much tougher battles. This is partly a question of scale. The Chancellor needs a further £13bn in both 2016-17 and 2017-18 on top of today’s cuts in order to meet his deficit targets. Without further tax rises or welfare cuts, that means speeding up departmental cuts by around 50 per cent after the election. Even keeping departmental cuts to their current pace would require £10bn of further tax rises or welfare cuts. But the battles will also get tougher for the simple reason that every fresh pound of cuts will be harder than the last. As things stand, 2016-17 and 2017-18 could leave departments like Defence and the Home Office a third smaller than they were in 2010. The last mile will be the hardest.
3. Everyone’s pretty much making it up Having said all of this, the most important thing today is to treat everything you hear with a big dose of scepticism. The level of uncertainty surrounding the Chancellor’s strategy is enormous. This is because the main figure guiding the cuts is the pledge to eliminate the structural deficit, the part of the deficit that won’t go away when the economy’s running at full capacity. Needless to say, that’s an incredibly hard thing to know. Far from being an academic point, these estimates about the size of the so-called ‘output gap’ change everything. Last year, two plausible estimates suggested that the Chancellor either needed to make £22bn of extra cuts by 2017-18 or else needed to make £35bn fewer cuts than planned. That’s a difference of £57bn. Bear it in mind when you hear confident statements today for or against £11.5bn of new cuts.