‘Inconceivable!’ The autumn statement that doesn’t add up
George Osborne's autumn statement will inflict "inconceivable" cuts on some government departments which will raise questions about their ability to deliver services, experts have warned.
Departments not protected by ringfencing will face total cuts of over 30% since 2010 by the end of the coalition's eight-year austerity programme, the Institute for Fiscal Studies (IFS) said.
Its assessment of Osborne's autumn statement found that spending cuts are likely to make up 85% of the total deficit reduction effort – not the 80-20 split between cuts and tax rises targeted by the chancellor.
The coalition will hold a one-off one-year spending review in the new year, which will reveal by the end of the first half of 2013 plans for the departmental cuts anticipated by Conservatives and Liberal Democrats in the 2015/16 financial year.
Assuming the coalition continues its austerity drive at the same pace as that seen in the period covered by the 2010 comprehensive spending review, all government departments will have to make cuts of 1.6%.
But with roughly half of all departmental spending in ringfenced areas like schools, the NHS and aid spending, the remaining departments will have to make cuts of around 3.6%.
By the end of the new five-year cuts programme in 2018 total spending cuts in the worst-hit departments could reach 31.5%.
"That begins to look close to inconceivable," IFS director Paul Johnson said. "Further welfare cuts and tax rises must be on the cards."
He said £27 billion would be required to protect other spending in real terms – a significant amount which also seems politically unfeasible.
Osborne's autumn statement was fiscally neutral, effectively swapping benefit cuts and tax rises on the richest for broader tax reductions like the abandoned fuel duty hike and increases in personal tax thresholds.
That effectively ignored the problem of falling revenues for the Treasury's coffers caused by a combination of stunted wage growth, lower than expected property transactions and lower interest rates.
"This is a story of George Osborne ignoring the deteriorating in mid-term borrowing costs, and just tagging it on to an extra year," Gemma Tetlow of the IFS said.
She said the chancellor had only just managed to meet his targets of reducing the deficit and borrowing.
Underlying borrowing has effectively increased by £36 billion by 2017/18, while without spending on investment the Treasury now faces a budget deficit of 1.6% by the same year.
The IFS noted that the independent Office for Budget Responsibility has taken government underspending into account for the first time.
This means the £5 billion of capital spending announced by the chancellor earlier this week is actually only £2 billion of new money – because £3 billion was not spent in previous years.
"There are big choices on health and welfare, crucially surely involving benefits for pensions, still to be made," Johnson added.
"And it is hard to believe there won't be more tax rises to come."
The IFS said the richest ten per cent would end up paying more as a result of the autumn statement, but noted that those in the three deciles below were better off as a result of its changes.
Much of this is due to the uprating of benefits, which will only increase by one per cent rather than inflation. This represents a four per cent cut in real terms, the IFS said.
It said Iain Duncan Smith's reformed universal credit will be significantly less generous to in-work claimants than previously planned.
