IFS: Osborne’s Spending Review does not mean an end to austerity

26 Nov 15

Austerity will continue and both significant public sector cuts and some radical reforms lie ahead, the Institute for Fiscal Studies said in its analysis of yesterday’s Autumn Statement and Spending Review.

Chancellor George Osborne has been lucky with Office for Budget Responsibility forecasts for the next five years, IFS director Paul Johnson said. These had delivered an extra £27bn allowing the chancellor to scrap planned tax credit cuts and protect the police budget.

However, the think-tank emphasised that the coming spending period would still be one of the tightest in post-war history, with low-income families and poorer councils standing to lose the most. And they could stand to lose more if the chancellor’s luck runs out and future OBR forecasts are less favourable.

Johnson noted that Osborne has set himself a “completely inflexible fiscal target”, unlike the “friendly, flexible fiscal target of the last parliament” which allowed him to accept a bigger deficit when growth and tax revenues disappointed.

It was only a change in the OBR’s modelling that altered the forecasts in the chancellor’s favour. But “the forecasts will change again, and by a lot more than they have over the past few months,” Johnson said. If Osborne is unlucky next time he will “have to revisit these spending decisions, raise taxes, or abandon his target”.

Combined with an improved fiscal forecast, the introduction of some new taxes, such as the apprenticeship levy on businesses and higher stamp duty on second homes and buy-to-let properties, have allowed the chancellor to deliver a less harsh Spending Review than many had predicted, the IFS said. However, although the road to the surplus may be slower, the chancellor still has the same fiscal consolidation target in his sights and spending is still going to bear the brunt.

Whitehall departments will lose around 18% on average, Johnson said, but this is not evenly spread out. Departments will generally be hit to the same degree that they were over the last parliament.

Those that did well last time will continue to see relatively smaller cuts, however those who suffered the most during the last parliament, namely transport and justice, are no better off this time round.

Funding for councils is to alter radically, with the revenue support grant phased out and authorities allowed to retain 100% of business rate income.

The Treasury has estimated this will mean a 7% real-terms cut, but the IFS said it was likely to vary significantly across councils.

Those councils generally more reliant on central grant tend to have higher social care costs but smaller tax bases and they tend to be in poorer, urban areas, the IFS said. Leafy, more affluent areas stand to benefit more from the changes, and the disparity in business rate growth creating big winners and losers in the long term.

The same is true in the short term regarding cuts to grants, unless these are distributed differently to take into account spending power as oppose to equally as they were over the last parliament.

Even with the tax credit U-turn, the IFS said the chancellor’s long-term welfare cuts remain largely unchanged. The short-term loss of tax credit savings will be completely offset by the roll out of Universal Credit, which was due to absorb tax credits anyway.

Meanwhile, independent analysis by the Resolution Foundation has shown that the longer-term impact of cuts to Universal Credit will fall overwhelmingly on working families. Some low-earning families with three children making new claims stand to lose around £3,000, it found, while average losses for a working household with children would be £1,300.

“These changes will also increase the risk of people being trapped in low-paid short-hours work,” said Resolution Foundation director Torsten Bell.

Even with significant cuts to welfare in the long term, additional cuts to Housing Benefit and a less-than-expected loss from throwing out plans to cut tax credits (due to a £1bn miscalculation by the chancellor and OBR in July), the IFS said Osborne only just about managed to stay within his self-imposed welfare cap.

In addition, he only achieved this by reclassifying funding for temporary accommodation from welfare to local government. The chancellor argued that because this will affect behaviour of councils, it constitutes a policy chance as oppose to a simple reclassification. The OBR accepted this argument, and as a result deemed Osborne to be within his welfare cap, the IFS said.

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