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.