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Spending review looms

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Spending reviews have been part of the governmental landscape since the late 1990s, but none have garnered quite the anticipation of the one which the Coalition government is to deliver on 20 October.

The reason?

A declared ambition to eliminate the bulk of the country’s structural budget deficit – that part of government borrowing that does not decline as the tax take climbs – by the end of the current Parliament and to set a fixed target for public debt as a percentage share of GDP, lowering it from its present 10.1 per cent to 1.1 per cent by 2015/16.

Under the plans, most Whitehall departments will be facing reductions in expenditure upwards of 25 per cent.

Spending Reviews

The purpose of the spending review is to set the budgets for individual departments – defence, education, business etc – as determined by the government’s spending priorities. Each department must then make a decision on how to best to manage the resources available to it.

As well as Whitehall budgets, the review looks at spending levels that cannot be fixed over a period of years. This includes welfare benefits, tax credits and local government expenditure.

Until the introduction of spending reviews, most planning was based on a year-on-year footing which made longer-term strategies more difficult to create.

The 2010 spending review will set government investment for the years from 2011/12 to 2014/15.

The Budget

It may seem the case that the government has already set out its spending plans in the June Budget.

The Budget, however, only provided an overall spending parameter.

Exactly how those funds will pay for public services will be detailed in the spending review.

The Chancellor, George Osborne announced in the June Budget that overall spending will increase from £640 billion in 2011/12 to £659 billion in 2014/15.

Despite the increase, in effect government spending will actually be £83 billion lower in four to five years’ time as a result of the planned cuts.

Some, but not by any means all, of those cost cuts were included in the June Budget. These amounted to £11 billion of welfare reform savings and a two-year freeze in public sector pay.

Importance of the 2010 spending review

Usually spending reviews are a matter of the Treasury tidying up the broad sweep of the Budget in terms of specific departmental allocations.

In one respect, the 2010 review is no different. In another, it is hugely significant.

In order to achieve the savings which the current government has set itself, public expenditure is to undergo an adjustment not seen in two generations.

The cuts will affect individuals, households, public institutions (the health service, schools, universities, the armed forces) and businesses.

The government has promised a “radical” appraisal of the delivery of public services.

Central to the government’s strategy is the hope that the private sector, boosted by tax cuts, will be able to take up the slack left in the economy by a much diminished state presence.

Supporters of the government position have praised it for its role in preserving the UK’s international credit rating; opponents have expressed worries that such a stringent reduction in public expenditure could force the economy back into recession.