The wait is over: the Spending Review 2010 has been announced

This blog speculated how and why there were going to be government cutbacks and identified the key areas of contention. Now the announcement has been made this blog along with other commentators can start to assess whether it is indeed a ‘fair’ plan and where growth will come form.

One goal for the austerity plan was to sure-up the markets – i.e. incentivise investment and maintain the top credit rating. I can confirm that the markets did like the plan. Yesterday the yield (which moves in the opposite direction to price and is a measure, therefore, of the level of risk associated with the investment) for 10 year government bonds decreased by 1%. But the question then must be; ‘is it worth it’?

First of all the 106 page document is a weighty tome to get through. Having said this certain key charts jumped out from the page. The annexes within this document are among the most interesting; especially section B which highlights the distributional impact of the impending cuts.

Budget Spending Review 2010

Table B.5 shows the impact of both the Budget (which includes pre-announcement measures) and the Spending Review as a proportion of net income for each decile. The issue which should jump out at you is the lowest decile – the impacts are disproportionately affecting the poorest in society. The government claims that this group is made up of students and the like but it still goes to show that the cuts will hurt.

Source: Spending Review 2010

The chart also indicates that the top decile will be the most affected – this is probably due to the increase in the top rate of tax which the previous government implemented and this government daren’t scrap given the public’s view on bankers.

The most revealing part of this graph, however, is how this specific announcement i.e. the Spending Review will impact society. The green bars show this – look how regressive the measures are. These newly announced cuts will definitively affect the poorest in society by a disproportionate level.

The left-leaning blog ‘Left Foot Forward’ also brilliantly analysed how the loss of public services (‘benefits in kind’) disproportionately affect the poorest in society. They showed that the changes in benefits in kind as a percentage of income hardest hits the bottom two quintiles – this is contrary to how the government presented the picture.

Source: Left Foot Forward

With all of these cuts, where is growth going to come from? According to the Treasury website growth will be attained through: 1. High-quality transport infrastructure; 2. Investment in regions where there will be a return and 3. skills, research and apprenticeships.

The improvements to the railways will almost certainly part-funded by the increase in rail fares (3% over inflation) as the government cutback on the subsidy. Nonetheless, a private sector led recovery needs improvements in infrastructure.

Conversely, the Regional Growth Fund of £1.4bn looks to be a nominal sum. After the replacement of RDAs with LEPs competition and efficiency for project funding should increase. However, as this blog as discussed in great detail in the past whether this amount (especially as no RGF money can fund the running of LEPs) will suffice.

There was good news for science and research as this investment will not be cut. This is vital for development of high-tech goods and services which we can export and compete on a global scale.

These cuts are huge. They affect those poorest in society and as there are more females working within the public sector they will be harder hit than males. While there is no doubt that the those within the top 2% of income will be hit extremely hard, this is often due to previous commitments to tax and nothing to do with the current government. Pensioners will be affected too – they keep the universal benefits of free bus-pass, prescriptions, winter fuel etc but those approaching retirement will get stung with the rising retirement age.

The speed with which the private sector is expected to pick up the slack is breathtaking. Just under 500,000 public sector jobs will be lost over four years with PwC stating there will be a further 500,000 jobs lost in the private sector due to the loss of contracts. With large scale cuts to the welfare system and yet unemployment set to rise where is the logic? Reforming the system is a necessity – reformation as well as cuts seems short-sighted.

Where is the plan for LEPs? If this is to drive and encourage private enterprise there needs to be further work in deciding the detail. This, too, may well turn out to be futile with the distinct lack of funding to develop a new framework.

Productivity, jobs and therefore tax revenue is the key to growth. While productivity will have to increase for people to keep their current jobs, unemployment will rise, benefit claims will increase, consumer confidence will fall and people will save (whatever they have left) rather than spend – this is all before VAT is increased and further quantitative easing is used (with inflation still climbing).

These could be dark times; all bow to the enterprise gods.

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