Our public spending cuts, in the pipeline since July, have been announced. Here’s some background on the structure of public finance in the UK. Salient points:
Public spending is divided into two: current spending on running costs of government, such as salaries and equipment; and capital spending on new roads, railways, bridges and schools. In the 2010-11 financial year, current spending is expected to be £637bn and capital spending £60bn.
…so, not much scope to cut infrastructure spending; it’s a drop in the ocean; and who would want to anyway, at this point in the economic cycle. Then we have:
The £637bn bill for current spending is split into two parts: the £343bn that the Treasury allocates to individual ministries such as the Home Office and the Ministry of Defence and the £295bn that goes on annually managed expenditure (AME), which is spent on servicing the national debt and welfare payments including state pensions. There is some discretion for Osborne to cut welfare payments – hence the means testing of child benefit – but not all that much, and debt interest payments have risen rapidly as borrowing has increased over the past three years.
AME gets cut by $10Bn, mostly benefit cuts; quite a hit for the poorer sections of society. But that’s all Osborne can take there; he has coalition partners.
That has meant Osborne has had his sights set on Whitehall departments. Here, though, the picture has been complicated by the decision to ringfence NHS spending, which accounts for one-third of all departmental spending.
So that’s £343Bn * 2/3 ~ £230Bn of spending that’s eligible for cuts delivering the rest of the promised £80Bn.
One component is an 8% cut in defence spending (the defence review crept out a day early). Two eyecatching features: the loss of 42,000 jobs, to save just £3Bn; and another (terminal?) contribution to Britain’s august tradition of aircraft carrier procurement horrors, which goes back to the 30s. Here we are now; for an idea of how just far we have come in the last 50 years try the 1960s. Quite why these latest near-supercarriers got the green light in the era of the UAV is anyone’s guess (mine would be: pork, in the American sense), but anyway, via cancellation clauses, this little trip down memory lane, along with the whole defence policy, has turned into a nightmare.
Last time we did anything like this, we got a currency crisis and a naval mutiny out of it. This time it may be the land forces that act up, if anyone does; they are plenty stretched by our overseas entanglement, and not very chipper. Perhaps our exit from Afghanistan will be hastier than we mean it to be.
Not mentioned in the above public spending analysis is the UK’s impressive “unfunded public sector pension liability”, which was nudging £1Trillion the last time I looked, nor the public-private partnerships that are the accounting mechanism for much public spending these days, and are usually hard to cancel – a factor in the messiness of the defence cuts and probably a factor in the ‘decision’ to ringfence the NHS, too.
Here are the guts of the cuts, £81Billion in all, via the FT:
Local government will suffer cuts of nearly 30 per cent by the end of the parliament, while the home office, justice department and foreign office will see cuts of 24 per cent. Additionally, the police force will see cuts of 16 per cent.
The department for business, innovation and skills will face cuts of 7.1 per cent a year, or nearly 30 per cent over 4 years. But the science budget will be protected at £4.6bn a year. Overseas development spending will reach 0.7 per cent of GDP by 2013, honouring the government’s commitment in the Budget.
The department for energy will see cuts of 20 per cent, but will have money for nuclear decommissioning. Defra [RS: that’s our farming/rural agency] will also face cuts of nearly 30 per cent.
The department for culture will see its administration costs cut by 41 per cent. There will be a 15 per cent reduction in spending on museums, arts and sport.
The government will introduce additional savings of £1.8bn by £2014-15 from the cost of public sector pensions, in addition to the outstanding plans, acheived by raising contributions.
There are a few specks of sugar on the pill:
But infrastructure spending will be £2bn higher, reversing cuts announced in the June emergency Budget, overseas development will rise in real terms, and social care will see extra funds.
Mr Osborne insisted that the government’s levy on banks balance sheets would raise more each year than the bankers’ bonus tax, introduced by Labour, raised last year – £3.5bn in gross terms, or about £2bn net of other lost national insurance and other revenues.
…Social housing will see new tenants pay rents at 80 per cent of market rates, up from 50 per cent previously, and the chancellor promised another 150,000 affordable homes over the next four years.
But social care will receive a boost of £1bn by 2014/15 and a further £1bn through funding via the NHS.
Mr Osborne confirmed that about 490,000 jobs will be lost in the public sector by 2014/15. But he said that the job losses were “unavoidable when the government runs out of money.”
The effects already include some arterial stress for MMT-ers, then.
I think those job losses (very roughly the same economic impact as 2.5 million job losses on the US) arise just from the primary effects of the cuts. Once you add in some feedback effects on our rather fragile recovery, you might have to double Cameron’s spuriously precise number. Divergent though our budgetary policies might be, it’s pretty hard to see how we won’t join the US in the next leg of a double dip. Let’s see how the debt/GDP ratio looks this time next year.
Short version: all these bets will have been settled by close of business today; the results of this bigger bet will take longer to come in. I am sure both deficit hawks and stimulus types will be interested in the outcome.
So much for the overview. When I get time I’ll do a slightly deeper dig, with an attempt at some actual politics and economics. In the mean time I would like you to remember that the really visible deterioration in our public sector finances came after we propped up the banks and warded off a US-style recession.