Wednesday, 20 October 2010

Comprehensive Spending Review

George Osborne has today delivered his much awaited spending review. It was fairly brutal.

Boy George: Undoing 13 years of Labour mis-rule

He intends to reduce the deficit every year until 2014/15 when he will balance the budget. By that time we will be spending £63bn a year just on the interest of our national debt, making the total national debt peak at something like £1.5 trillion.

He ring-fenced four areas of spending: health, education, security and infrastructure. The rest was up for grabs. The MOD are losing 8% straight away but the army in Afghanistan is protected by a special contingency fund. The central civil service will shrink by a third, saving £6bn over 4 years and losing 490,000 members of staff. (Natural wastage is 8% so this will be less painful than you might think.)

The police are losing 4% a year, the FCO 6% a year, international development is actually going up, but China and Russia aren't getting aid anymore. The Home Office is losing 6% a year, the Ministry of Justice is losing 7% a year.

Another £7bn will be raised by clamping down even harder on tax evasion.

The BBC is to have the license fee frozen for 6 years and will assume the financial burden of the World Service and BBC Monitor which monitors the broadcast media around the world. This effectively gives them a budget cut of 16%.

The retirement age is to rise to 66 by 2020 and civil servants will have to pay more into their pension funds which are currently 2/3rds unfunded, but they keep their defined benefit pensions.

The MPs' pension scheme will be completely overhauled; stunned silence in the chamber when Osborne said this! (MPs currently get 1/40th of their final salary per year of service, index-linked. It's just about the most generous scheme in the public sector.)

A lot of benefits are to be cut although some tax credits are to go up. For example at the moment if an unemployed person under 25 claims housing allowance they will be paid enough to live in a room in a shared house. After 25 they get their own flat. The transition age is being raised to 35.

Equitable Life policy holders are getting bailed out at long last. Not the full amount but what they would have got if they had put their money in a different company. Cost to the tax-payer: £1.5bn.

Old people get to keep all the perks that were thought to be at risk: bus passes, free TV licenses (over 75s only), free prescriptions.

The shadow chancellor, Alan Johnson, who was only appointed a couple of weeks ago and immediately claimed he needed to get a copy of Economics for Dummies (or words to that effect) rose to reply but really had nothing to say. He warbled on about how the Tories hadn't been calling for cuts back in 2007.

All in all, this CSR is a big step in the right direction. And after the small print has been analysed it might turn into an even bigger step, the true implications of these things are rarely apparent on day one. Of course, the fiscal situation is only one of the country's major woes. There is also immigration, Europe, ethnic crime etc. But those are outside George Osborne's remit so he couldn't really be expected to comment on them.


Dex said...

RE: Civil service job losses - natural wastage may have been 8%, but with fewer jobs to go to will it remain that high? Also if many of those who leave are in the South-East, will that not mean job losses still in other less affluent regions?

Can I ask you a few questions?

1) Who do we owe the money to? Is it not international banks?

2) Is the Bank of England owned by the state, or is it in the hands of private individuals?

Nationalist said...

My answers,

1) We owe money to whoever holds government bonds. This is mainly UK citizens via their pension funds, but also foreigners.

2) The BoE is ostensibly owned by the British Government. It was created as a private bank with private customers but was nationalised in 1946. It has held a monopoly on issuing bank notes in England for 150 years or so. Note that in Scotland and Ulster there are private banks still allowed to issue bank notes.

I say "ostensibly" because there are conspiracy theorists who claim that the nationalisation Act allowed for some private ownership to remain; and therefore it still remains behind the scenes.

However there can be no real doubt that the government controls the BoE, hires and fires the Governor etc.

There is reason to believe the BoE still had some private customers thought. (In addition to all the retail banks who are required to maintain an account at the BoE.)

AgainsTTheWall said...

Despite the cuts total spending still set to rise year on year largely to fund debt payments, state and public pensions and PFI costs although green initiatives and the EU feature as well.

So the cuts are necessary just to reduce the growth of govt spending.

Ozzy has nt clarified (at least to me)how the annual deficit of £150billion+ is to be dealt with. This must be thru increased revenue to that amount but where is this extra to come from?

VAT is set to rise which is forecasted to raise an extra £13billion. Whence the other £140billion? Do they really expect a burgeoning economy (in their dreams) to generate this much additional revenue or have I missed something?

AgainsTTheWall said...

Following from above...I have wondered why there is such a clamour from the govt for bank lending to be stepped up. A prole might be forgiven for wondering why, when we are loaded with debt we should see the govt urging more upon us.

The answer might be that lending\borrowing is about the only way to increase GDP in our post-modern economy. With the rise in GDP (and debt)govt revenues increase. So the govt gets to balance its books whilst the country sinks under more debt. Sustainable solution or sheer insanity?

Nationalist said...

To be fair, the government mainly wants bank lending to businesses to be increased. People borrow to consume (generally) while businesses borrow to produce, ie a firm borrowing £1m of working capital might use it to generate £2m of profit; hence the economy grows. (That's an extreme example of course.)

As for the deficit. GO says that by progressively reducing spending year on year he will by 2014/15 have knocked £81bn off the budget. The other half of the deficit is deemed non-structural, ie, will vanish of its own accord as the economy improves, causing the welfare bill to fall and the tax base to rise.

Hence by 2014/15 the deficit will be zero and repayments of the national debt can start.

It remains to be seen if that actually happens.

AgainsTTheWall said...

Thanks for that response Nationalist. I would repeat that govt spending will rise to £737billion in 201`4-15 and not fall. And I would question whether the recovery in the British economy envisioned will occur. More likely I feel is a continued decline but time will tell.

Voice of Reason said...

Fairly brutal, yes. But not brutal, enough. If only George had been brave enough to stop ALL welfare benefits with immediate effect. Scroungers have had it too good for too long!

Revisionist said...

1946 Nationalisation: as you state, some conspiracy theorists maintain that nationalisation was in effect a phoney.

My best guess is that this must be correct, since all other aspects of money issue and Jewish influence generally expanded through the entire 20th century.

This piece
by Jane Birdwood mentions the nationalisation, but isn't referenced in any sort of thorough way.