Figures to look at in the Public Spending Review

There is plenty of scope for confusion over the government’s announcement on Wednesday. The government will break down its five year forecasts of spending by department and between its different categories of spending. It may offer “real terms” as well as cash figures.

Some people will concentrate on taking five year changes and adjusting them for estimated future price and wage inflation, to give an impression in selected areas of large cuts.  I would suggest we give more weight in any anyalysis to the 2011-12 figures.

It is highly likely some of the 2014-15 figures will be changed before we get to that year. There might be new priorities between departments by then. An imminent election may lead to a reappraisal of overall spending. Pay and price inflation will by then be known for the period 2011-14, which may cause adjustments to be made. If inflation has come in lower the benefits and pension bill will be lower, if higher the reverse.

The government’s main concern since taking office has been to curb the runaway deficit it inherited. This is about controlling cash spending as soon as possible, so what happens next year to cash spend is very important. If the government does well with its welfare to work programme then it could save money on the welfare bill for the best of reasons as more people get jobs, and reduce the deficit more rapidly. If the Bank starts to get a grip on inflation, that could relieve some of the cost pressures on spending, which would also help.

The future pattern of deficit reduction is also very dependent on rising tax revenues, largely forecast to arise through a decent rate of economic growth. The government will need to review its strategy in the light of growth rates achieved, given the importance of this to the plan.

Mr Alan Johnson yesterday for the Opposition agreed the deficit needed to be brought down. His proposal was to increase capital spending by an additonal £10 billion, to be paid for by a larger tax on banks. As he has previously stated that such a tax should only be imposed if there could international agreement to it, to avoid loss of more business from the UK, this does not add up  to much of a strategy.

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20 Comments

  1. norman
    Posted October 19, 2010 at 7:28 am | Permalink

    Your series of posts leading up to this spending review have been outstanding. Without wanting to sound too sycophantic I feel I’ve learnt more about the true state of our finances from this site than all others combined.

    Thank you.

  2. Brian Tomkinson
    Posted October 19, 2010 at 8:44 am | Permalink

    You are wasting your time if you expect any kind of economic strategy from Johnson. His appointment is a cynical act of base politics. His job is to say all the populist things about banks and taxing the rich whilst protecting the poor in his “chirpy chappy” way. Don't expect any ideas from Labour but be aware that they will be encouraging their paymasters and storm troopers in the unions to make life as difficult as possible for the coalition government.

  3. Lottery Balls
    Posted October 19, 2010 at 11:10 am | Permalink

    The main solution to the deficit is more people in (real and productive) employment and fewer claimants. What is needed for this is banks that lend and a sense the country is moving towards a smaller state and lower tax rates which, will give more tax receipts anyway. No real sign of this as yet still tax and waste.

    And drop the over expensive high speed rail project. Similar time saving could be made just by simpler and better ticketing systems and hence fewer queues for tickets and better connections to intercity routes. Also high speed rail is often worse on overall fuel use than flights are anyway and over the short UK distances makes little sense. It just sounds good in theory.

  4. English Pensioner
    Posted October 19, 2010 at 11:42 am | Permalink

    The typical Labour approach.
    Decide to spend some money, and then, as an afterthought, decide where it is to come from.
    Hitting the banks may sound a good idea to the ignorant, but in the long run, they will simply put up their charges making us all pay through a form of indirect taxation, which is something that all politicians love. The indirect consequences of causing businesses to move abroad is simply ignored.

    Which is why, incidentally, I prefer the US sales tax to our VAT. When you buy something, they add the tax to the price on the label, so every time you are reminded of how much the state takes from you in taxation. Which is why, no doubt, their sales tax is just a few percent as against our soon to be 20%.
    No wonder Euro-politicians aren't keen on the idea and force shops to include all taxes on the label price!

    • simon
      Posted October 20, 2010 at 8:56 am | Permalink

      Ironically Johnson may well be right about reducing the cuts to capital expenditure by 10 billion , just wrong about how to pay for it .

      All politicians seem to be concentrating on a recession and ignoring the underlying trends .

      Things are never going to return to the way they were because the way they were was artificial , supported by credit in so many forms ; borrowing from insitutions , pay as you go old age benefits etc .

  5. Alex_Sabine
    Posted October 19, 2010 at 1:48 pm | Permalink

    The decision to present changes in spending in real as well as cash terms is not some bizarre idiosyncrasy of the present government, "to give an impression of large cuts", but the conventional way in which economic and public finance statistics are presented in most of the world.

    For example, when we talk about a recession, we mean a period of declining *real* (inflation-adjusted) GDP. The economy is in recession if nominal GDP grows by less than the inflation rate. In 2008-09 the recession was so severe that there was an absolute decline in nominal GDP. This decline was less than 2%, but we don't say that output fell by 2%; we express it in real terms, since this is what matters for living standards.

    Likewise, if tax thresholds were frozen over the CSR period to take no account of inflation, we would rightly describe that as a rise in the tax burden. And if the state pension were to be frozen for four years, that would amount to a significant cut in its purchasing power.

  6. Alex_Sabine
    Posted October 19, 2010 at 2:22 pm | Permalink

    In an ideal world, where the value of money was totally stable, then it wouldn't be necessary to make this distinction. But since the inflation target is positive (2%) – and experience suggests we would be doing well to hit that – it doesn't make sense to assume zero inflation, and of course the compound effect makes that difference significant over a period of 4-5 years.

    That said, for the purposes of public expenditure *planning* it does make sense to use cash rather than volume terms, since it focuses attention on the cost of policies and the money that actually has to be raised through taxation and borrowing. This has been done since Denis Healey and Joel Barnett abandoned the old Plowden volume planning system and introduced cash limits in 1976.

    So cash limits are used to fix spending totals and the amount available to each department – but they do take account of expected economy-wide inflation. When analysing changes to spending, it therefore makes sense to look at *both* (a) cash totals, since these are crucial to the actual borrowing requirement, and (b) the cash spending plan deflated by the projected increase in average prices across the economy (the GDP deflator).

  7. Lola
    Posted October 19, 2010 at 2:34 pm | Permalink

    Entirely o/t – I sincerely trust that you are fully briefed regarding tomorrows RDR debate in the Commons. If not, I'd be delighted to explain how fatuous the RDR is.

  8. Iain Gill
    Posted October 19, 2010 at 2:42 pm | Permalink

    at least alan johnson has not got a public school accent, and has done a real job at some point, compared to this the conservatives are not putting on a winning show presentationally

    there are many conservative supporters with working class accents, who didnt go to public school, and who have done proper jobs, it amazes me that more of them are not in evidence, especially given the overwhelming odds which should be in their favour

    back to the substance pretty good analysis from john redwood the UK financial director in waiting, however i miss the other stuff from john redwood the UK operations/delivery director in waiting, i know you have a rounder view of issues than this i guess im just interested in seeing more of it

    love this bog, love the fact we have an MP like you, great stuff

  9. REPay
    Posted October 19, 2010 at 2:48 pm | Permalink

    A major test for BBC Radio 4 tomorrow as they are trying to reveal the truth about the spending figures. The programme will be part of the More or Less series with Tim Harford of the FT – perhaps worth trying to speak to him!

  10. ferdinand
    Posted October 19, 2010 at 5:53 pm | Permalink

    It is well to remember some words of Ronald Reagan " the nine most terrifying words in the English languuage are ' I'm from the government and I'm here to help' "

  11. Dave Cherling
    Posted October 19, 2010 at 8:00 pm | Permalink

    Certainly a brilliant deficit reduction program to saddle us with 2 aircraft carriers with no aircraft to put in them. Billions of borrowed pounds to build and maintain until, maybe, they have something to carry. Still gives work to the dozens of Admirals that might otherwise have to be pensioned off. Look forward to Dave's next brilliant decision.

    • Andrew Johnson
      Posted October 20, 2010 at 9:15 am | Permalink

      Dig a little deeper and you will discover that the previous ineffective and incompetent Labour government, led by the outstandingly incompetent and ineffective MOD, signed contracts which made cancelling the 2 carriers, far more expensive than building them. There aren't too many customers for Aircraft carriers so you might have thought they could drive a really hard bargain. Mmmm – wonder why they didn't?

      • EJT
        Posted October 20, 2010 at 7:04 pm | Permalink

        "signed contracts which made cancelling the 2 carriers, far more expensive than building them"

        There's a point where you grasp the nettle and terminate the contract, fairly reimbursing the contractor for the costs incurred, some premium, and that's it. If necessary, reestablishing crown immunity or the like to block legal challenges. It's the country's security that is at issue here. The alternative is, yet again, unacceptable binding of the actions of incoming governments.

        • Andrew Johnson
          Posted October 20, 2010 at 9:39 pm | Permalink

          Sounds reasonable, but commercial contracts whether entered into by private firms or governments are fully legally binding. That is the purpose of a contract. My point is that the penalty clauses for cancellation were there for the government and MOD contract negotiators and lawyers to see. Why didn't they?
          This toxic contract signed by Labour, has cost the nation dear, both in financial, defence and prestige terms. Will those responsible be brought to account and face the full glare of publicity? Have instructions been issued to ensure that such a contract is never entered into again?

          • EJT
            Posted October 22, 2010 at 8:57 am | Permalink

            I understand what you are saying. But if, as you say, the contract is only being continued due to toxic penalty clauses, there is no reason why they should be binding and an equitable renegotiation should not take place. In a B2B context, if the customer was in financial difficulties, that is what would happen.

  12. Martin
    Posted October 19, 2010 at 8:01 pm | Permalink

    One figure to watch is the inflation rate. If this goes higher than expected then the public finances will be horrible.

  13. Lindsay McDougall
    Posted October 20, 2010 at 5:37 am | Permalink

    Two things now appear clear. Firstly, this is a responsible Government that will attempt to do its duty. Secondly, Ed Milliband will unleash his trade union thugs to try and derail the plans.

    One thing to keep our eye on: is the pain being fairly shared between the generations? If all the pain is felt by the economically active and the young, and none by the retired elderly, there are going to be problems. It isn't too much to ask people to work until 70 if they haven't saved enough.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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