IFS on the Spending Review: “Lucky” Osborne has eased the squeeze – but chancellor may have to revisit cuts plan

Institute for Fiscal Studies says talk of "end to austerity" is premature

By Matt Foster

26 Nov 2015

Whitehall departments fared better than expected than expected from Wednesday’s Spending Review, according to the Institute for Fiscal Studies – but the settlement remains one of the “tightest” government has endured in living memory.

Chancellor George Osborne on Wednesday used revised economic forecasts from the Office for Budget Responsibility – showing lower-than-expected debt interest payments and higher tax revenues – to ease the planned squeeze on departmental resource budgets. Osborne was able to unveil some surprise protections, including shielding police funding and maintaining the Foreign and Commonwealth Office’s budget in real terms over the next four years.

But the independent IFS think tank on Thursday said the better-than-expected forecasts meant Osborne had been “lucky”, and warned that the chancellor could be forced to revisit departmental spending plans if the OBR’s sums were revised in the other direction. 

“He is going to need his luck to hold out,” said IFS director Paul Johnson at a briefing in London. 

“He has set himself a completely inflexible fiscal target – to have a surplus in 2019-20. This is not like the friendly, flexible fiscal target of the last parliament which allowed him to accept a bigger deficit when growth and tax revenues disappointed. This is fixed four years out. 

“The forecasts will change again, and by a lot more than they have over the past few months. If he is unlucky – and that’s almost a 50-50 shot – he will have either to revisit these spending decisions, raise taxes, or abandon the target.”

Prior to the Spending Review, the IFS had predicted that unprotected departments faced average cuts of 27% to their resource spending. 

Johnson said the comparable scale of the cuts across unprotected departments following Wednesday’s statement was 18%, even with the chancellor avoiding the need to shelve his plans to run a £10bn surplus by 2019-20. 

But the IFS director urged caution after some commentators interpreted the eased settlement as a major shift in economic strategy.

“The first thing to say is that this is not the end of ‘austerity’,” Johnson said. 

“This Spending Review is still one of the tightest in post-war history. Total managed expenditure is due to fall from 40.9% of national income in 2014-15 to 36.5% in 2019-20. 

“A swathe of departments will see real terms cuts. The 3% cumulative increase in health spending over the next five years is not far off the average annual increase in spending in the last 50 years.

“On the other hand there is no question that the cuts will be less severe than implied in July. The gap with what one might have expected based on the Conservative manifesto is substantially greater.”

The IFS director said that while it was “foolish” to speculate on what might have happened had the OBR’s revisions gone the other way, basing big spending decisions on relatively minor shifts in the economic outlook remained risky.

He said: “Would it really, in those circumstances, have made sense to impose swingeing cuts on the police? It is odd that small corrections to forecasts are presented as driving big changes in policy.”

The IFS said the introduction of a new apprenticeship levy, changes to stamp duty on buy-to-let properties, and new powers to allow councils to raise tax to pay for social care had prompted a slight shift in the proportion of the government’s fiscal consolidation programme which would come from tax rises.

Previously, the IFS had calculated that 14% of the deficit reduction programme would come from taxes, with 86% delivered through spending cuts. The Spending Review announcements meant tax would now account for 17% of the total, the IFS said.

But Johnson added: “Spending will still bear the brunt.”

IFS researcher Gemma Tetlow said that while Osborne had been able to smooth the trajectory of his planned spending cuts, the overall picture remained broadly the same.

“There was a lot of talk yesterday about the end of austerity and easing the squeeze,” she said.

“It is worth reiterating really that although he’s topped up the spending plans, we’re still in a situation where he’s looking to make quite significant cuts to some areas of public spending over the next few years. So things are perhaps not quite as bad as we thought they might be, but for many departments it’s far from easy riding the next few years.”

Tetlow also presented research (see left) showing the cumulative impact of cuts on government departments after a decade of austerity – with the Department for Transport enduring a 70% cut to its resource budget between 2010-11 and 2019-20, and the Ministry of Justice absorbing a 45% reduction in its day-to-day spending.

More coverage

Spending Review: MPs give cautious welcome to Foreign Office protection
Spending Review verdict: reaction from the FDA, PCS, Prospect, the Institute for Government, the RSA and the CBI
Spending Review: 100,000 public sector jobs will go by 2020, OBR predicts​
​Spending Review 2015: DWP to cut estate by 20% as government eyes £4.5bn savings
Spending Review 2015: Key workforce, estate and financial management reforms – and the assets in line for privatisation
Spending Review 2015: The departmental settlements

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