191115 Malleability of Spending Reviews
  • Things have changed. In six days’ time, with his latest Spending Review, George Osborne will set departmental budgets for the next five years – or will he? The above chart compares what was planned for the last Parliament with what was actually achieved. You’ll notice that there’s quite a bit of similarity between the two; not least in the total cuts administered to departmental expenditure limits, which were meant to, and indeed did, hover around the 10 per cent mark. But there are also some striking differences. Why?
  • Reason 1) Reclassifications. Among the explanations is the Government’s persistent tendency to tinker. Spending items are rethought and reclassified. What was once one department’s responsibility becomes another’s, or moves out of the departmental sphere entirely. This is particularly true for the local government part of the DCLG budget. Thanks to the localisation of certain policies, such as business rates, the department’s purview – and its official spending – shrank significantly in the 2013-14 financial year. This exaggerates the cuts that have actually been made.
  • Reason 2) A new plan. And Governments tinker in other ways too. The plans from 2010 were changed on the fly, in ways that I’ve described before, but they were also changed in the largely forgotten Spending Round of 2013 as well as in Budgets and Autumn Statements. The Department for Energy and Climate Change, for instance, had its budget extended by a new package of green policies introduced in 2013 and detailed in section 3 of this memorandum.
  • Reason 3) Inflation. Then there are those things beyond the Government’s direct control, among them inflation. The Spending Review of 2010 used forecasts for the next five years that, unsurprisingly, turned out to be wrong. As the Institute for Fiscal Studies explains in this report, “Resource spending has been cut more than originally intended in cash terms, but inflation has turned out lower than forecast, so it has still been cut less than originally expected in real terms.” They also usefully include a table, on page 162, which shows how the 2010 plans would have panned out under the actual levels of inflation.
  • The lesson. All of which is to say that Spending Reviews are malleable, and can be reshaped by forces from both inside and outside the Government. This simple fact ought to be remembered when Osborne sits down from the despatch box next week. His speech will reveal a lot about this Parliament’s fiscal parameters, but it will not be the final word.