« Are the Fed / BoE about to wreck a promising economic outlook? | Main | UK public borrowing still on course for undershoot »

UK Spending Review cuts tough but comparable with history

Posted on Wednesday, October 20, 2010 at 03:26PM by Registered CommenterSimon Ward | CommentsPost a Comment

There was little macroeconomic "news" in the Spending Review.

The Chancellor confirmed the current expenditure totals set out in the June Budget. By cutting a further £7.0 billion from the welfare budget and finding other savings of £3.5 billion, however, he was able to moderate the squeeze on departmental current spending, which will be £10.3 billion higher than previously announced by 2014-15.

There is also a small rise in capital spending relative to previous plans, of £2.3 billion by 2014-15. The investment outlook, however, is still grim, with a real-terms fall of 39% between 2009-10 and 2014-15.

"Total managed expenditure" (TME) – current plus capital spending – is projected to peak this year and fall by 3.3% in real terms by 2014-15. Contrary to popular assertion, such a decline is not unprecedented – following the IMF rescue in 1976, real TME was cut by 3.9% in a single year in 1977-78.

As a proportion of GDP, TME will fall from a peak of 47.5% in 2009-10 to 41.0% by 2014-15 – a cut of 6.5 percentage points over five years. This also has historical precedent: the TME share declined by 6.5 percentage points in five years from a peak in 1982-83 and by 5.5 percentage points in five years from 1992-93 – see chart.

A projected 1.2% real-terms reduction in TME in 2011-12, equivalent to about £8 billion, is unlikely to derail the economic recovery. A much greater threat is posed by previously-announced tax measures designed to raise nearly £20 billion next year – see previous post.

PrintView Printer Friendly Version

EmailEmail Article to Friend

Reader Comments

There are no comments for this journal entry. To create a new comment, use the form below.

PostPost a New Comment

Enter your information below to add a new comment.
Author Email (optional):
Author URL (optional):
Post:
 
Some HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>