Spending Review Expert Panel: Andrew Lilico: The Chancellor looks forward to 2015, and tries to forget 2010

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The point of this 2015-6 spending review was clearly to arrange, in more detail, Osborne’s hoped-for battleground for the 2015 General Election.  He capped total welfare spending (excluding pensions) – will Labour match that?  He ended automatic pay rises in the public sector – will Labour’s public sector union paymasters be willing to see that matched?  He dipped the Lib Dems' hands firmly in the blood, complimenting Danny Alexander on how supportive he’d been in finding cuts.  He tried to set up the notion that the welfare system has to be fair to those that pay as well as fair to those that receive.

What he didn’t say, however, was that this spending review is a reflection of the failure and abandonment of his 2010 deficit reduction plan.  Conservative spokesmen regularly still refer to the “deficit being cut by one third”, but neglect to note that that is relative to 2009/10.  More than half of that boasted “one third” reduction was achieved in 2010/11, largely by following Labour’s spending plans — the Coalition’s Spending Review wasn’t even published until October 2010.  In the first year over which the Coalition had full budgetary control — 2011/12 — the budget was £120bn, and £120bn it has remained ever since.  In Autumn Statement 2011 Osborne abandoned his plan of eliminating the structural current deficit over one Parliament, and since then there has been no progress on the deficit whatever, except via accounting wheezes involving Royal Mail and QE.

The original 2010 plan was based very heavily on growth – more than 60% of the deficit reduction forecast by this point was supposed to have come from growth.  No growth; no deficit reduction.

Mercifully, we are now, at last, implementing spending cuts rather than talking about them whilst we raise taxes and (who’d a thunk it?) growth is picking up.  But we now see the sinister hand of the inflation-predictor in fiscal policy.  Welfare levels have nominally-frozen rises; the defence budget is frozen in nominal terms; the total welfare bill (excluding pensions cannot rise); the higher rate tax threshold has long since ceased to rise with inflation.  The spin has been about how these nominal freezes might mean 1% or 2% real terms cuts per year — but that’s only true if inflation is just 2-3%.  A nice dose of 8% inflation and all of a sudden the taxes are flowing and the welfare and defence budget have been slashed.

Growth is probably coming (absent banking sector meltdown in China, a further round of collapse in the Eurozone, the war in Syria spilling over and spiking oil prices, or a big bank going bust in Britain).  When it comes, all will look happy for three or four quarters.  And then the inflation will come.  As Jeff Goldblum in Jurassic Park III might have said about the politics and fiscal consequences of all unsustainable inflationary growth: “Oh yeah, 'oooh, ahhh.' That's how it always starts. Then later there's running, and screaming.”