Review that reflects political and economic reality

George Osborne There are still enormous uncertainties hanging over Mr Osborne's review

Labour says today's spending review is a reflection of the government's "economic failure". To an important extent, that's true - this is a review Mr Osborne has been forced into by the poor performance of the economy.

But, looking at what the chancellor has announced today - and the political environment in which he and everyone else in Westminster is now operating - you would have to say that it is also a reflection of the chancellor's political success.

Think about it: he has now laid out the 6th of what is now likely to be a 7, or 8 year austerity programme. That has slashed the size of many Whitehall departments, in a dire economic environment, and put us on a road to a very different kind of public sector despite the continued high level of borrowing. In future, the government will spend quite a lot on social security, health, defence and education - and not very much else.

The opposition may continue to protest, but the reality is that a majority of the public has accepted both the direction of change - and the broader argument for the austerity that gave rise to it. And Labour has had to accept those things too.

We saw that again when we interviewed Ed Balls today on the special Spending Review programme. He bemoaned the lack of a growth strategy from Mr Osborne. But I did not hear him explicitly reject any of the cuts that have been announced today.

Deep cuts

Don't underestimate the change that those cuts in planned spending represent.

For example, today the Communities Department received another 10% real terms cut in its non-capital spending in 2015-16, on top of the 50% cut it has already seen. Its capital budget has been cut by another 35% in 2015-16 (from £4.8bn to £3.1bn). That's on top of a 74% cut in its capital spending since 2010.

Transport has seen its investment budget increased in 2015-16 - and relatively protected since 2010. But its resource budget is being cut by another 9%, on top of the 21% cut since 2010.

Eric Pickles says he is getting help from other sources, which makes the real cut in local government spending in 2015-16 "only" 2.3%. But there are question marks about where the extra money is coming from. If it comes from handing extra responsibilities to the NHS, critics will say that the NHS has, in fact, faced a real cut (even if the underlying reform to social care makes sense, as many say).

The NHS is only due to get a 0.1% real rise in spending in 2015-16, it wouldn't take much to push it into negative territory. But it will account for a third of public service spending by 2015-16 - up from a quarter in 2010-11. Social security will take a rising share as well, with or without the "cap" Mr Osborne announced today, in large part because of the decision to protect nearly all spending on the over-65s. That promise was only very slightly rescinded today, with the small change to who will get the winter fuel allowance.

Many in Whitehall say it makes sense to exclude the state pension from the so-called "welfare cap". When we interviewed him a few minutes ago, Danny Alexander, the Chief Secretary, said the cap would cover about £100bn - or just under half of the welfare budget.

It's easy to see the politics of a welfare cap - especially one that will be announced just before the election. But from an economic standpoint it's not clear it will make a huge difference.

The IFS director, Paul Johnson, told us this was something that the Treasury could do now, if it wanted to. It will be "cyclically adjusted" - in effect - because the chancellor says highly cyclical spending will not be included. And, it will not include the largest single part of the welfare bill: the state pension.

Nor will the cap itself be legally binding. The OBR will point out when it's breached, and, err, that's it. In that sense, it's no more binding than Mr Osborne's promise to have debt falling as a share of GDP by 2015-16, which was also "policed" by the OBR. We all know what happened to that.

I hope to have more on the issue of automatic pay progression in the civil service later on. Long suffering readers of this blog will remember I banged on about this last autumn.

Back then, lots of civil servants wrote to tell me their departments have not had annual increments for several years. The "tweetback" I got from angry civil servants was quite vociferous on the subject. The Police Confederation say the same. In fact, I haven't been able to find anyone who will own up to getting any of these automatic pay rises since 2010.

That doesn't mean that they are not responsible for some of the surprising upward pay drift in the public sector, despite the formal "freeze". It does make me curious to know how much money the Treasury expects this move to save.

Wild cards

But perhaps the most important point to make about this review is that it's anything but final.

If everything with the economy goes according to plan, George Osborne or his successor will need one, maybe two more years of steep cuts to get rid of his chosen measure of structural borrowing.

But there are two massive wild cards: the bond markets and the OBR's assessment of the economy.

If long-term interest rates keep rising, the chancellor could find himself paying out more in extra debt interest than he has saved with today's cuts. If the OBR take a different view of the long-term state of the economy between now and then - the chancellor might easily need to make even more cuts in 2015-16, or he might not even need to make the real cuts that have been announced today.

Those are the enormous uncertainties hanging over this review. By comparison, the politics seems rather clear - and a lot more favourable to the government than most people would ever have predicted.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

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  • Comment number 230.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 229.

    Why do all Govs only talk about cuts and borrowing money for infrastructure and defence?
    Because he is desperately trying to keep our minds off the fact that by definition most of the cash belongs to the rich. And the rich are terrified that people may ask them to take their money out of easy investments and invest in new things in the UK that take brains - like making and trading things.

  • Comment number 228.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 227.

    Cuts for some maybe - but obviously not for Mr. Osborne! Ten quid for a burger when he claims that JSA is 'enough' at £71.70 a week for all bills. food and clothing? I'd be lucky to get that for a week of dinners.

  • rate this

    Comment number 226.

    During yesterday's financial statement George Osbourne stated that more jobs had been created since 2010 than those lost from the Public Sector. I would like Stephanie or someone more knowledgeable than me to question whether this claim equates to Full Time Equivalent (FTE) aggregation or is just a head count including part-time jobs? I am surprised that journalists have not reviewed this claim.

  • rate this

    Comment number 225.

    Whatever your views on this (useless) government, one thing that can't be laid at their door is the fault for the economic mess.

    Want a ruined economy? Vote Labour.

    Want to take part in illegal wars? Vote Labour.

    Want to see the UK broken apart by devolution? Vote Labour.

    Want to be swamped by immigrants? Vote Labour.

    Want to be called a racist for speaking up? Vote Labour.

  • rate this

    Comment number 224.

    As soon as people start talking about economics their common sense vanishes, and they start obsessing about every morsel of nonsense that 'experts' feed them on the BBC.
    Pensions, NHS, OBR, the EU - all the immaterial rubbish.

    Common sense - Our problems are caused by a national shortage of cash caused by not enough import earnings and high borrowing due to a dangerously pathetic government

  • rate this

    Comment number 223.

    It is a lot worse in most EU countries, in fact it is lot worse globally. The UK will recover if the EU and rest of the global economy recovers.

    There is a bigger picture.

  • rate this

    Comment number 222.

    If spending money on infrastucture boosts an economy then the £300b of off balance sheet PFI would have boosted the economy but it just boosted our debt.

    If we put a weeks borrowing (£2b) into fast tracking shale gas production we could let the profits fund future infrasture and pay down debt. It is an investment with a big return on capital.

  • rate this

    Comment number 221.

    Surely out of the EU, we would be free to negotiate our own trade contracts and tariffs. That being said and admittedly speaking with some ignorance of the EU treaty as a whole, so far I just cannot see the advantage of being a federal part of it. I strongly believe in the right to self-determination, something at present we do not have. I am proud to be English, British and European.

  • rate this

    Comment number 220.

    Time to stop talking rubbish.
    If you are broke today you won't alter that by adjusting the kids pocket money, reflagging the drive, buying a better burglar alarm or building a granny flat.
    The nation collectively needs to get out in World and find a job, to collect what is owed, learn a trade, oust the leeches, and stop it's obsession with hating one another.
    We need a strong government.

  • rate this

    Comment number 219.

    "majority of the public has accepted both the direction of change" Just where do you get your figures from to justify that comment? From I last heard there are 65million plus people in this country, has everyone been consulted then as I don't recall? Please stop making claims like this, unless you can show us all the figures for everyone. This review is because he failed so far, thats the story.

  • Comment number 218.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 217.

    OK the economy is struggling and the Coalition hasn’t managed to fix everything but no one was ever going to. At least they are doing something and taking some bold decisions. Better that than whinging, fawning and fantasising that you can please everyone when you can't. As for the alternative, why would anyone with a brain trust the buffoons that that got us into this mess in the first place?

  • rate this

    Comment number 216.

    Yes there is certainly political concord: George has well and truly depressed economic growth and it is not going to be easy to fix.
    There is an assessment deficit, and a solution deficit .
    Can we import some politicians from successful countries?
    All George does is shabbify, shrink, and depress us. He has reduced public sector effectiveness.
    Let's not let him forget he ihas truly failed.

  • rate this

    Comment number 215.

    The rich have 95% of the worlds wealth.

    Which part of that sentence do you Einstiens find it difficult to understand?

  • rate this

    Comment number 214.

    Strange thing about the cuts is no-one has analysed what we have got in value for money terms with them.
    eg to save 2 years of a civil servant's pay over a five year plan, early retirement/ redundancy costs 3 years of the wages.
    So have we saved 2 years pay, or have we wasted 3 years pay and got no work done for the money?
    Has George really wasted £50 billion?
    Stephanie can you help?

  • rate this

    Comment number 213.

    I'd really like to comment on the Oxford child grooming case, now that it's concluded, but, once again, the BBC denies the public the chance to take part in a healthy debate on what is arguably the most important UK news story of the day.

  • Comment number 212.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 211.

    208.Rossman "If you work in the public sector stop whining. "
    Who the Hell are you to say that to Para Medics, Firefighters and Doctors etc...?
    I work for the Private sector, I'm in a Union and we get negotiated Pay Rises. You may think it's a virtue to let your Boss Mug you off, but some of us would sooner stand up for ourselves than be a gutless YES MAN !


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