UK Spending Review cuts tough but comparable with history
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.
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