Osborne sharpens his axe

Huge cuts needed to scale back the State

GEORGE Osborne’s dream of scaling back the State and unleashing a new wave of private enterprise will require spending cuts ‘on a colossal scale’, according to experts.

In this week’s Autumn Statement, the Chancellor said he will pull Britain ‘out of the red into the black for the first time in a generation’.

His plan involves banking a surplus of £4bn in 2018-19 and £23.1bn in 2019-20 – the first since 2001. But it also means cutting State spending to its lowest level for 80 years.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), says: ‘How do we get to this sunlit upland in which we have a budget surplus?

‘Spending cuts on a colossal scale, taking total government spending to its lowest level as a proportion of national income since before the last war.’

Not everyone believes it is achievable – although Johnson cautions against dismissing Osborne’s plans out of hand.

‘The Chancellor is right to point out that it has proved possible to implement substantial cuts over this parliament,’ he says. ‘One cannot just look at the scale of the implied cuts going forward and say they are unachievable. But it is surely incumbent upon anyone set on taking the size of the State to its smallest in many generations to tell us what that means.’

Here the Mail examines five charts, numbered above, that underline the scale of the job in hand.

1. Government borrowing

Britain was last in surplus around the turn of the century as New Labour pressed ahead with the tight spending plans inherited from the Tories.

But it soon loosened the purse strings and ran a deficit in the years leading up to the financial crisis. When the crisis struck it lost control of the public finances and borrowing soared to a record £153bn in 2009-10, Labour’s last year in office. The deficit has since fallen but far slower than planned by Osborne in his ‘emergency’ Budget of June 2010.

Osborne now plans to deliver a surplus in 2018-19 and an even bigger one in 2019-20 – handing him a hefty war chest with which to fight the 2020 election should he still be in office.

2. Spending and receipts

Government spending hit 45.3pc of GDP in 2009-10. As the graph shows, it is due to fall to 40.5pc of national income this year and then 35.2pc in 2019-20.

According to the Office for Budget Responsibility (OBR), the independent Treasury watchdog, this takes it ‘ below the previous post-war lows reached in 1957-58 and 1999-2000 to what would probably be its lowest level in 80 years’.

It also takes government spending back below tax receipts for the first time since the turn of the century – resulting in the budget surplus targeted by the Chancellor.

But delivering will not be easy. As the IFS points out, 88pc of the tenyear austerity package planned by Osborne comes from spending cuts rather than tax rises, and only £35bn have already happened, with a further £55bn to come.

‘Receipts are projected to end the forecast broadly in line with their average share of GDP over the past 20 years,’ adds the OBR.

3. Departments take the hit

Government spending can be split between what is spent on Whitehall departments, such as transport, the Treasury and the Home Office, and so- called Annually Managed Expenditure ( AME) which includes welfare payments, public sector pensions and the interest on the national debt. As the graph shows, AME is expected to be relatively flat at just below 21pc of GDP over the coming years, but spending on departments falls sharply from 20.6pc last year to 14.8pc in 2019-20.

The OBR says that just 40pc of the cuts required to day-today Whitehall spending have been implemented.

Spending per person is set to fall from £5,650 in 2009-10 to £4,910 this year and £3,880 in 2019-20, a decline of 31pc over ten years.

4. Unprotected budgets hammered

By ringfencing the budgets for health, schools and overseas aid, the burden of the cuts has fallen on other departments such as defence and business.

If the same policies are applied in the next spending round, due after the general election to outline the government’s plans beyond 201516, unprotected departments face further cuts.

As the table shows, spending on these departments could fall from £188.1bn in 2009-10 and £147.2bn this year to just £85.6bn in 2019-20.

‘The implied cuts during the next Parliament would pose a significant challenge if they were confirmed as firm policy,’ warns the OBR.

The IFS says that unprotected departments could see their budgets cut by more than 40pc over ten years of austerity.

5. The changing role of the state

With health spending protected and pension spending rising due to an ageing population, more and more money is swallowed up by these two areas, leaving less to spend elsewhere.

‘What will local government, the defence force, the transport system, look like in this world?’ says Johnson.

‘Is this a fundamental reimagining of the role of the state? One thing is for sure.

‘If we move in anything like this direction, whilst continuing to protect health and pensions, the role and shape of the state will have changed beyond recognition.’