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Q&A: Government spending review | Q&A: Government spending review |
(about 2 hours later) | |
By Edwin Lane Business reporter, BBC News | By Edwin Lane Business reporter, BBC News |
After months of warnings, the UK's "age of austerity" will begin in earnest this autumn when the government announces the results of its spending review. | After months of warnings, the UK's "age of austerity" will begin in earnest this autumn when the government announces the results of its spending review. |
It will give us the details of which government departments will need to cut their spending, and by how much. | It will give us the details of which government departments will need to cut their spending, and by how much. |
So why are cuts on the cards, what might the impact of those cuts be, and are there any alternatives to cuts? | So why are cuts on the cards, what might the impact of those cuts be, and are there any alternatives to cuts? |
Why is the government making cuts? | Why is the government making cuts? |
The public finances are in a poor state. | The public finances are in a poor state. |
In the 2009-10 financial year, the budget deficit hit a record £155bn, meaning the government spent significantly more than it earned from taxes. | In the 2009-10 financial year, the budget deficit hit a record £155bn, meaning the government spent significantly more than it earned from taxes. |
That meant the government had to borrow money to fill the gap, adding to the UK's growing debts. Total debt is expected to reach £900bn (70% of GDP) in the next few years. | That meant the government had to borrow money to fill the gap, adding to the UK's growing debts. Total debt is expected to reach £900bn (70% of GDP) in the next few years. |
Big cuts to spending are therefore planned to cut the budget deficit and allow the government to start paying back its debts. | Big cuts to spending are therefore planned to cut the budget deficit and allow the government to start paying back its debts. |
Are there any alternatives? | Are there any alternatives? |
In closing the gap between income and expenditure, the obvious alternative to spending cuts is to raise taxes. | In closing the gap between income and expenditure, the obvious alternative to spending cuts is to raise taxes. |
Tax increases are being introduced, but they account for less than a quarter of the £86bn target. | Tax increases are being introduced, but they account for less than a quarter of the £86bn target. |
The previous Labour government, responsible for many of the tax increases adopted by the coalition, said they would aim for something closer to 67% cuts and 33% tax rises. Ed Miliband, a current Labour leadership contender, has voiced his support for a 50-50 split. | The previous Labour government, responsible for many of the tax increases adopted by the coalition, said they would aim for something closer to 67% cuts and 33% tax rises. Ed Miliband, a current Labour leadership contender, has voiced his support for a 50-50 split. |
Labour also favour spreading the cuts over a longer time period in order to reduce the pain. | Labour also favour spreading the cuts over a longer time period in order to reduce the pain. |
Some left-leaning think tanks have also proposed alternatives. One - Compass - argues that reforms to the tax system, including introducing a 50% income tax rate at a lower threshold, would reduce the need for cuts. | Some left-leaning think tanks have also proposed alternatives. One - Compass - argues that reforms to the tax system, including introducing a 50% income tax rate at a lower threshold, would reduce the need for cuts. |
It also adds that the cuts should be more selective rather than across the board, with items such as the Trident nuclear submarine programme and Private Finance Initiatives (PFI) in the firing line. | It also adds that the cuts should be more selective rather than across the board, with items such as the Trident nuclear submarine programme and Private Finance Initiatives (PFI) in the firing line. |
What will the impact of cuts on the economy be? | What will the impact of cuts on the economy be? |
According to Labour, the economy remains fragile, and severe cuts to public spending should wait until the economy is strong enough to withstand them. | According to Labour, the economy remains fragile, and severe cuts to public spending should wait until the economy is strong enough to withstand them. |
They say cuts on the scale being proposed risk propelling the UK back into recession - which would push up unemployment and welfare bills as well as cutting tax receipts, thus hampering efforts to cut the deficit. | They say cuts on the scale being proposed risk propelling the UK back into recession - which would push up unemployment and welfare bills as well as cutting tax receipts, thus hampering efforts to cut the deficit. |
Economists, as ever, are divided over the impact cuts could have on the UK's recovery from recession. | Economists, as ever, are divided over the impact cuts could have on the UK's recovery from recession. |
The new Office for Budget Responsibility forecasts the economy will grow by just 1.2% this year, and by 2.3% in 2011. | The new Office for Budget Responsibility forecasts the economy will grow by just 1.2% this year, and by 2.3% in 2011. |
The coalition government has placed cutting the deficit at the heart of its economic policy, arguing that the poor state of the UK's public finances poses a greater threat to economic recovery than cuts in spending. | The coalition government has placed cutting the deficit at the heart of its economic policy, arguing that the poor state of the UK's public finances poses a greater threat to economic recovery than cuts in spending. |
The chancellor has also pointed to the Greek debt crisis that erupted in Europe earlier this year as a sign that the UK's debts must be tackled as a matter of urgency. He also says his measures will keep interest rates lower than they would otherwise be, thus helping the economy recover. | The chancellor has also pointed to the Greek debt crisis that erupted in Europe earlier this year as a sign that the UK's debts must be tackled as a matter of urgency. He also says his measures will keep interest rates lower than they would otherwise be, thus helping the economy recover. |
How did we get into the current situation? | How did we get into the current situation? |
The UK has been running a budget deficit for many years, financing spending programmes through borrowing. | The UK has been running a budget deficit for many years, financing spending programmes through borrowing. |
This is not uncommon, even among the most developed economies, and economists remain divided over the benefits and drawbacks of running a deficit. | This is not uncommon, even among the most developed economies, and economists remain divided over the benefits and drawbacks of running a deficit. |
But that pushed total government debt up to about 35% of GDP before the beginning of the financial crisis in 2008. | But that pushed total government debt up to about 35% of GDP before the beginning of the financial crisis in 2008. |
That crisis, and the recession that followed, then forced a huge increase in government spending, with billions spent on stabilising the banking sector, funding economic stimulus measures and welfare costs for the rising number of unemployed. | That crisis, and the recession that followed, then forced a huge increase in government spending, with billions spent on stabilising the banking sector, funding economic stimulus measures and welfare costs for the rising number of unemployed. |
At the same time the decline in the economy resulted in a fall in tax income, widening the gap between government earnings and government spending to its current record level. | At the same time the decline in the economy resulted in a fall in tax income, widening the gap between government earnings and government spending to its current record level. |
class="section-header" | href="/nol/shared/spl/hi/dhtml_slides/css/v3/styles.css?2" rel="stylesheet" type="text/css" /> class="dslideshow-header">Taxand spending
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What will be cut? | |
Is this spending review an emergency measure? | |