Plenty of pain, but more to come

In many ways, today’s Spending Round represents more of the same. Over the course of this Parliament, departmental spending is falling by an average of just under 2.5 per cent a year: today’s announcements effectively extend that process into the first year of the next Parliament. The combined impact of these changes stacks up into a once-unthinkable outcome.

By the end of the five year period, total departmental spending will be some 11 per cent lower than in 2010-11, and every additional pound will prove harder and harder to find. Moreover, with continued protection for spending on health, schools and overseas aid, many departments are facing much more significant cumulative cuts. As the chart below shows, key departments such as defence (20 per cent), BIS (26 per cent) and the Home Office (28 per cent) all face budget reductions of more than one-fifth over the five years from 2010. And at the extremes, the FCO (51 per cent) and Communities (62 per cent) stand to be cut by more than one-half.

Yet the really depressing news is that there’s more to come. Even after all of the savings set out today have been delivered, the coalition’s current deficit reduction plans call for roughly a further £26bn of fiscal tightening. Attempting to raise all of this via further departmental cuts appears implausible, particularly if the current ringfencing of some areas of spending is maintained – under such a scenario Communities would face a total cut of more than two-thirds for example.

Clearly something has to give. In truth, it points to a set of nightmarish decisions for whichever party is in government after the next election. We can expect to hear much more in the build up to that election about the need for further cuts in social security spending – the welfare cap announced by the Chancellor today could have major implications for the roll out of Universal Credit. We’re unlikely to hear as much about tax rises, yet given the scale of the task at hand it’s hard to imagine the next Chancellor resisting the temptation of pressing that particular button. And with continued uncertainty about the future shape of economic recovery and even about the size of the hole we’re trying to fill, we can’t rule out the prospect of a further slippage in the deficit reduction trajectory. This period of austerity is already set to last three years longer than the coalition originally predicted, don’t bet against it sticking around for longer still.