Things can only get worse

24 Apr 12
Clive Sparrow

New fiscal rules announced by the government are a crude curtain raiser to the next Spending Review, which is likely to be even tougher than the current financial restrictions

Chief Secretary to the Treasury Danny Alexander announced yesterday that he is imposing tough new rules on government departments to ensure that spending is kept under tight control.

Alexander announced that all departments have to identify around 5% of their resource budget that could be re-prioritised if new pressures emerge or new policies have to be funded. This 5% provision in effect amounts to new cuts in public spending of around £16bn.

While it is true that no departmental budgets are being changed as a result of this exercise, does anyone seriously believe that they will remain intact?

The fiscal deficit, however, was not caused by poor spending controls in Whitehall departments. I do wonder, therefore, whether yesterday's announcement was no more than a smokescreen for the start of the next Spending Review.

Detailed information hidden away by the Treasury in Budget documents published last month showed public expenditure beyond 2014-15. The small print said that ‘in the absence of policy change, Departmental Expenditure Limits will continue to see significant real reductions in 2015-16 and 2016-17’.

In fact, the average real reductions in spend accelerate from 2.3% a year in the current spending review period to 3.8% a year in 2015-16 and 2016-17. This information confirmed that spending cuts beyond 2014-15 will be more severe than the current round. They are currently unplanned by the government.

An early Spending Review in either 2012 or 2013 was almost certain following the Budget, given that the key economic predictions on which Spending Review 2010 is based are no longer valid. It now looks like the review has started earlier than anyone predicted and with a very crude curtain raiser.

Clive Sparrow is a director at Pareto Management

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