26 Jun 2013

The Chancellor’s sunlit uplands

The spending review was an attempt to mark a turning point for the coalition. A change in the record. The talk was of sunlit uplands, and “raising our national game”, of investing in the future. Tomorrow’s highly likely erasure of the double dip recession and Danny Alexander’s announcement of £100 billion of capital projects, and a ten year £300 billion programme, is an attempt to turn the tide. Vince Cable must be happy with limiting cuts in his department. More will be announced tomorrow on, for example, the Green Investment Bank, and industrial policy.

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The telling things though were, for example, no train fare rises, and no tuition fee rises, which were key changes in 2010. There was £5bn efficiency savings promised, and these often end up being a close proxy for the amount of tax rises that will come after an election that are not admitted to beforehand. People based abroad who claim the winter fuel allowance will not be able to claim it if it is sunnier than the sunniest part of Britain – the world’s first temperature contingent fiscal consolidation.

The benefit cap is truly innovative. It reflects the fact that though the Spending Review has kept Whitehall spending in check, AME, Annually Managed Expenditure, has increased substantially since the coalition came to power, by 30 per cent, from £290bn to £384bn. So you can see why some effort to control this part of the budget, now the majority of the budget, has been put in place. The cap applies to a quarter of this spending: tax credits, incapacity benefits, Employment Support Allowance, but not to Jobseekers’ Allowance and the state pension. It protects the old, and the unemployed. In a time of high unemployment, it allows the “automatic stabilisers” of unemployment benefit to work. But what then? People’s tax credits are squeezed because there is a recession? Should you avoid a disability claim near the end of a fiscal year in case the cap is breached?

Again we have a political value judgement that pensions should be protected come what may, wheras support for families with tax credits for example will be squeezed, and violently if necessary. Politically sensible with an ageing electorate, but where does it end?

The enforcement mechanism is a letter from the Office for Budget Responsibility’s Robert Chote. It is unclear how this plays out in practice. Still, overall, does it make sense to manage the AME budget in some way? Clearly it does.

On capital, the Treasury uses a measure of public investment that flatters its investment and happens to be going up (admittedly it is not egregious chicanery, which I had suspected earlier on). A different measure, net investment is going down, and has been halved. If rhetorically they are willing to wax lyrical about investment spending, why don’t they actually increase the amount from where we were in March? (Actually it is a tiny amount, £10m, lower because of museum reforms). Or rather, if public investment is the future, why did they make it their priority form of cutting over the past three years? (A: plans inherited from Labour).

The bigger point is this: Osborne has some sunny months ahead of him. Double dip over. A better Q2 GDP number. And the prospect for the first time I think, ever, of an Autumn Statement where the OBR upgrades growth, and downgrades borrowing. That is why he’s talking incessantly about Britain on the rise. Will it hold for two years though?

*  Headline total managed expenditure will in 2015/16 be £745 billion versus £669bn in Labour’s last year. Not generalised “brutal austerity” in cash terms. There are focussed areas of fiscal violence though, such as the Communities budget, traditionally thought of as the housing budget, took a further massive cut to £4.3bn. I was £13.3bn under Labour. In an era of infrastructure led growth and a highly dysfunctional housing market, is it really the priority?

– also watch out for epic new pain in local councils.

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