This is not the end of ‘austerity’. A swathe of departments will see real terms cuts. On the other hand there is no question that the cuts will be less severe than implied in July. The gap with what one might have expected based on the Conservative manifesto is substantially greater.
How has Mr Osborne done that whilst keeping to his surplus target in 2019-20? He has banked some changes in forecasts for lower debt interest payments and higher tax revenues. That was lucky. By adding some tax increases he has made some of his own luck.
He's going to need his luck to hold out. He has set himself a completely inflexible fiscal target – to have a surplus in 2019-20. The forecasts will change again, and by a lot more than they have over the past few months. If he is unlucky – and that’s almost a 50-50 shot – he will have either to revisit these spending decisions, raise taxes, or abandon the target.
Yesterday we also saw glimpses of George Osborne the reforming Chancellor. He really is cutting spending on non pension benefits to its lowest level relative to national income for about 30 years. The changes to local government financing and devolution are genuinely radical and could transform both the role of local government and the UK’s fiscal architecture.
*The spending (and tax) numbers*
There are still some very significant cuts ahead. Unprotected departments’ spending on service delivery and administration is falling 18% by 2019-20.
That these cuts are now so materially different to what was expected is down to a “gearing” effect. Only about £90 billion of this ‘resource DEL’ spending is unprotected. By comparison with July’s implied numbers this spending will be cut by £5 billion less. That’s a very small number in the scheme of government spending – but accounts for nearly 6% of all unprotected spending. That’s why small changes to the forecast and relatively small tax increases can have such a big effect on the percentage cuts to be suffered by these departments.
So one story is that the police and the foreign office, for example, were spared expected cuts because there were modest changes to forecasts. Perhaps it is foolish to speculate about what might have been. But suppose the forecasting changes had moved in the other direction. Would it really in those circumstances have made sense to impose swingeing cuts on the police? It is odd that small corrections to forecasts are presented as driving big changes in policy.
Don’t forget though that this was also a tax raising budget. £3 billion tax on the payrolls of companies. An increase in stamp duty land tax of nearly £1 billion on second homes and buy to let properties. An extra 2% a year on council tax bills to help pay for social care. But spending will still bear the brunt of the consolidation.
The biggest welfare announcement was that tax credit cuts proposed for April 2016 will no longer happen. They have been abandoned entirely. The long term cost? Nil. Why? Because the equivalent cuts to Universal Credit, now legislated, were left untouched. The expected cost of the U turn is £3.4 billion in 2016-17 but less than £0.5 billion by 2020-21.
The policy change ensures that no family will take an immediate cash hit. But the long term generosity of the welfare system will be cut just as much as was ever intended as new claimants will receive significantly lower benefits than they would have done before the July changes.
*Education, Local government and devolution*
The chancellor has talked of a “devolution revolution”. This is not just political hype – but we are also in the middle of a revolution in the funding of English local government. In part this reflects a big cut in central government support – cuts of over 50% in this spending review period, come on top of big cuts in the last parliament. These cuts in grants have had big distributional effects – those authorities more dependent on central government funding have seen their spending power reduced much more than others.
Councils’ spending power already depends, in part, on how much business rates are raised in their area. They get to keep up to 50% of the growth in their rates revenue that’s due to new development. The Chancellor confirmed plans to go further. These changes have big effects on economic incentives, financial risk and funding patterns across the country. How much councils have to spend in future will depend much more on the performance of their tax base than it did in the past. This is a big change.
What isn't such a change are the 'new powers' for councils to cut or reduce these rates. Councils already have many of these powers, and they have been little used.
Finally, another change in prospect, is a long overdue reform to the way in which schools are funded. For more than a decade grants to local authorities to pay for schools have been based on little more than historic allocations, themselves based on complex funding formulae. Different local authorities have themselves taken very different views as to how to distribute money to their own schools. This has resulted in differential funding for schools which is hard to understand let alone justify.
Previous governments have signally failed to sort this out when there has been plenty of money around. It will be harder to make changes when money is tight. It is to be hoped that this government will be more successful than its predecessors in effecting rational reform.