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OBR confirms predictions of larger spending cuts after 2015

19 June 2019

The Office of Budget Responsibility published a working paper on 9 September 2014 which examines trends in UK public finances over a 12 year period from the start of the financial crisis in 2007 to the end of the current Treasury forecast period in 2019. The report has plenty of detail on spending trends but, right at the end, calculates that current spending plans imply a sharp reduction in public spending after 2015 that will affect the Department of Business Innovation and Skills (and hence higher and 19+ further education). The OBR report is here OBR calculate that governent spending plans imply 43% cuts in "unprotected deparmtents" like the Department for Business Innovation and Skills over the next 4 years. The report makes a number of observations and assumptions which lead to this conclusion: (1) the government has ensured that spending on public services since 2007 (ie spending within Departmental Expenditure Limits) has stuck to the cash totals announced in successive budgets. The issue at the height of the financial crisis and recession was that the fall in the size of the economy made spending less affordable (page 93). (2) both the Labour government (in its last year) and the Coalition government have sought to "reduce the deficit by cutting spending to levels that would be affordable against lower expected receipts". This has involved sharp reductions in capital spending, cut to welfare spending and ("much the largest component") cuts to current spending on public services page 110). (3) HM Treasury plans to reduce the revenue departmental expenditure limits (RDEL) by 1.7% of GDP between 2013-14 and 2015-16 with the "unprotected departments" having to find a reduction worth 1.3%. OBR note that the largest unprotected departments are the Ministry of Defence and the Department of Business Innovation and Skills (page 119). Taking the GDP figure for 2013-14 of £1,742 billion (page 114), a cut of 1.3% of GDP requires spending to fall by £21 billion in 2 years (from £157 billion to £136 billion). (4) OBR notes that longer-term spending plans are unclear but that the spending totals announced in the March 2014 budget imply a reduction in spending on the unprotected departments of 2.5% of GDP over the 5 year period from 2015-16 to 2018-19 (7.9% less 5.4%). They assume some further post-2015 spending cuts in the protected departments (health, overseas aid, education) but also that the unprotected departments will take 75% of the load. With GDP forecast to rise to £2,042 billion by 2018-19, this translates into a additional reduction of £43 billion taking the total down to £91 billion. (5) OBR comment that revenue spending on the unprotected departments in 2018-19 would - on this basis - be "little over half the level spent in 2013-14" (page 119). (6) OBR do not examine the components which are not protected but there are some clear difficulties in making cuts of this order. Some departmental expenditure limits (for example spending in Scotland, Wales and Northern Ireland or on defence and intelligence) will be incredibly difficult to cut. Spending on local government has been maitained so that council tax can be frozen. Net spending cuts in the home office and or on transport have been achieved by increasing income (eg higher visa fees, higher rail ticket prices). (7) OBR note that their report is based on the "continuation of current policies of the current government" but include quotes from the Chancellor (a Conservative), Chief Secretary to the Treasury (a Liberal Democrat) and the Shadow Chancellor (Labour) all of whom promise to close the defict in the next Parliament (page 132).