Rollercoaster or not, arguing over spending cuts is a pointless task

After crunching the Treasury’s numbers the Office for Budget Responsibility claimed that the Chancellor’s plan would lead to a ‘rollercoaster profile’ of public spending, with drastic cuts in the next two years allowing for a splurge in spend the year after. The squeeze on departmental budgets, the OBR warned, will be ‘much more severe than anything we have seen to date’. The Chancellor has rejected the OBR’s characterisation of his future spending plans. He argues that the bulk of cuts will not, as the OBR says, come from departmental budgets but from a £12bn reduction in welfare spending. This, together with more aggressive measures against tax avoidance, will deliver a ‘more balanced approach’ to spending cuts that would match the pace seen in the current Government and still deliver the promised surplus by 2020. This disagreement stems from the fact that – as we have previously noted – the OBR treats different kinds of Government spending plan in different ways. When calculating its economic forecast, the OBR starts with two figures: one is the Treasury’s total spending assumption, which can be split up into three components: departmental spending, or DEL, which is set by Government; Annual Managed Expenditure, or AME, which is demand driven and includes welfare spending; and tax revenues. The other element in the OBR’s calculation is its own economic forecast.

The OBR then adds into the mix its own projections for what tax revenue and AME spend will be based on Government policy projected forward. It then subtracts these projections from the Government’s total spending assumption, and takes the remainder as departmental spending. The source of the disagreement is that while the OBR has accepted the total spending assumption as agreed Government policy, it has classed welfare and tax changes as Conservative party policy and excluded them from its analysis. The result is a spending profile that is skewed towards heavy cuts to departmental spend, because the OBR is obliged to discard the other side of the Chancellor’s equation – the savings he will generate from tax and welfare changes. If we are to have a sensible debate on the fiscal choices facing future governments then the way these numbers are constructed needs to change, so that different kinds of spending are treated consistently. This would then allow a mature and transparent debate about the spending choices on offer. Instead, we have had a pointless spat about how to distinguish between plans and policies. This serves nobody, least of all the public who, with weeks to go before the election, are still in the dark about the scale of cuts on offer. The Institute has made these points before – but they bear repeating. It’s clear that whichever Government assumes power after the election, cuts to public spending are inevitable. What is needed is a debate about where cuts can be made, and at what pace.