Spending Review: Understanding the figures

  • 26 June 2013
  • From the section Business
Chart showing departmental cuts

What does the chancellor mean when he says that a department's budget is being cut by, for example, 7%?

It seems like a silly question, but actually it may not mean what you think it does at all.

Take the Department for Culture, Media and Sport (DCMS), for example.

George Osborne said the department would: "make savings of 7% in its resource budget".

The clue to the confusion is in the word "resource".

The amounts departments are allowed to spend are divided into resource spending and capital spending.

The Treasury explains the difference like this: "Resource spending is money that is spent on day to day resources and administration costs. Capital spending is money that is spent on investment and things that will create growth in the future."

The Spending Review documents show that the department's resource spending is being cut from £1.2bn to £1.1bn, which is actually an 8.3% cut, but that is because the Treasury only gives figures to the nearest £100m.

Presumably the unrounded figures would actually show a 7% fall.

Double the cuts

But what of capital spending? That is going down from £300m to £100m, which the documents tell us is a cut of 57.6% in the unrounded figures.

So, spending in the department will actually have to go down by about 14%, which is twice as much as was announced in Parliament.

But in fact, the cuts could be considerably lower than that, because Departmental Expenditure Limits (DEL) exclude some parts of spending that come under the broader banner of Annually Managed Expenditure (AME).

AME includes things that it is very difficult for the government to control, such as pensions for retired civil servants and welfare payments.

AME may not be such a large factor in the DCMS, but in some departments it is the majority of spending, and cuts in DEL will make little difference to the overall spending of the department.

Unusually, the chancellor has announced measures in this Spending Review to reduce AME, by putting a cap on welfare spending.

A change to AME in the DCMS from this Spending Review involves giving museums greater financial freedoms, which is scheduled to cost the department £40m in 2015-16.

And there are further complications in whether its budget is going down by 7% or 14%.

"Elite sports will be protected while the funding of community sports, arts and museums will be reduced by just 5%," the chancellor said.

So, if all those areas are being relatively protected, some of the other things the department does must be being hit much harder.

The DCMS, for example, is the department responsible for equality and human rights, the Olympic legacy and encouraging tourism.

So for people who work in the department or interested in a particular aspect of what the department does, the 7% figure given in Parliament is of relatively little value, and the important figures will emerge in the coming weeks and months.

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