Spending Review: quick summary

In headline terms, the Spending Review looks little different from the public finance forecasts in the summer budget.  The Government will achieve a fiscal surplus by the end of this parliament (the first time that this has been achieved since 2001). And total public spending as a percentage of GDP will fall from 40% currently to 36%.

But Osborne has managed to achieve this whilst simultaneously being more generous on the spending side.

The worst of the proposed tax credit cuts have been reversed (the proposed reduction in the work allowance will not be implemented, nor will the increase in the taper rate). However, this generosity will not be extended to Universal Credit, which will eventually replace tax credits. So although the reversal to tax credit cuts will cost the Chancellor £3.3bn next year, this cost will fall year-on-year as claimants ‘migrate’ from tax credits to UC. In this way, the Chancellor can still achieve his objective to reduce welfare spending by some £12bn by the end of the parliament – its just that this now takes longer to achieve, and he will breach his self-imposed ‘welfare cap’ for the next three years.

Cuts to departmental spending are also not as bad as most people expected. The total real terms DEL cut over this parliament is now 3%, compared to a forecast 6% cut forecast in July’s Budget.

How has Osborne managed to achieve his overall fiscal targets whilst simultaneously raising spending relative to the summer forecast? First, there are two big revenue raising measures. The first is the ‘Apprenticeship Levy’. This is a tax of 0.5% of an employers paybill (for employers with a payroll cost greater than £3m) and will come into effect in 2017. It is expected to raise £3bn a year by the end of the parliament. The second is a 3% levy on existing rates of Stamp Duty payable for second homes and buy-to-let properties. This is expected to raise £900m by 2020.

But beyond this, the Chancellor has also benefitted from two pieces of good news from the OBR. The first is that the estimates of economic growth have been (slightly) raised, which feeds through to higher tax receipt forecasts (and means that a given level of spending can be expressed as a lower percentage of GDP). The second is that interest rate forecasts have been lowered, which means that debt interest payments swallow-up a lower proportion of total government spending, leaving more for other stuff.

What about the implications for Scotland? In funding terms, the Scottish Government will see a 5% real terms cut in its allocation for day-to-day resource spending, from £25.9 in 2015/16 to £24.6bn in 2020/21. There has been a slight tweak in the way that Scotland’s ‘Barnett consequentials’ are calculated, meaning that Scotland is no longer protected from cuts to Local Government spending in England to the same extent that it used to be.

Over the same period, the Scottish Government’s capital allocation will rise by 5% in real terms, from £3 to £3.2bn.

Buried deeply in the OBR forecasts is some slightly bad news for John Swinney. The OBR has reduced its forecast of revenue from the Land and Buildings Transactions Tax in Scotland, (equivalent to Stamp Duty, which is now devolved to Scotland). For 2015/16, the forecast for LBTT has been reduced from £540m to £397m. This is perhaps not huge in respect of the Scottish Government’s total budget, but it represents a fairly substantial fall in percentage terms.

Of course, given that LBTT is now devolved to Scotland, the Chancellor’s proposal to raise Stamp Duty on second homes and buy-to-let properties will not apply here. It remains to be seen whether (and how quickly) the Scottish Government follows the UK policy change.

Overall, the departmental spending plans contained within the Spending Review are higher than were forecast in the Summer Budget (and substantially higher than were implied by the Conservative Manifesto), funded partly through better economic news (higher growth and lower debt interest spending), and partly through some tax increases. Welfare cuts have been delayed rather than eliminated. The big question is whether the economic forecasts that underpin these plans will turn out to be overly optimistic.

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