Jonathan Werran 05 February 2015

Capital winners from next Spending Review forecast

Whitehall departments with large capital budgets are set to emerge as relative winners from the next full spending review, public finance experts have claimed.

Launching the Green Budget – a paper outlining scenarios for chancellor George Osborne ahead of next month’s Budget – the renowned Institute for Fiscal Studies think-tank reported the known spending plans of the three main political parties would favour civil service departments responsible for infrastructure.

While budgets for day-to-day operations had experienced significant cuts over the current parliament, the Government had rowed back from original plans to slash capital spending.

Instead capital spending by departments has been cut in real terms only about half as much as originally planned, and an additional £6bn allocated to long-term government infrastructure projects.

In consequence the Department for Transport, the Department for Business, Innovation and Skills and the Department for Education were likely beneficiaries of the next spending review, IFS economist Soumaya Keynes claimed at a briefing yesterday.

By contrast the Home Office, the Ministry of Justice and the Ministry of Defence faced steeper cutbacks among departments unprotected from the ring-fence afforded the spending on health, schools and overseas aid.

Protecting these priority areas of expenditure from 2015–16 on would mean that the Autumn Statement plans for 22% cuts overall between 2010–11 and 2019–20 would become 42% cuts for unprotected departments – which include the Department for Communities and Local Government.

The IFS clarified more than half (55%) of the planned deficit reduction had been achieved, but that £92bn further Government budget cuts were required until the end of the decade.

However, almost all (98%) of the remaining fiscal consolidation is earmarked from further spending cuts, and if the Autumn Statement plans were realised there would have to be £51.4bn cuts between 2015/16 and 2019/20. These would fall on top of £38.2bn cuts made from 2010/11 to 2015/16 – which in an historical context is the longest consecutive period of expenditure reductions since World War Two.

The IFS said cuts of this scale could lead to public spending falling to its lowest share of national income since at least 1948 – although relative per-head spending on public services would be at levels last witnessed in the early 2000s.

This would also mean fewer people working in the public sector than at any time since at least 1971 – with up to 550,000 general government jobs to be shed under Conservative fiscal consolidation plans and 300,000 under Labour and Lib Dem proposals which do not envisage running a budget surplus.

Paul Johnson, director of the IFS questioned whether Mr Osborne was in reality the austere chancellor either he or his critics painted him as - having borrowed more money as economic growth stalled in the early years of the parliament.

‘He has not cut spending in real terms as much as planned, as inflation has undershot. And he has cut departmental investment spending by only half as much as he originally planned,’ Mr Johnson added.

‘One result is that he or his successor will still have a lot of fiscal work to do over the course of the next parliament. The public finances have a long way to go before they finally recover from the effects of the financial crisis,’ Mr Johnson continued.

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