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Spending review: parties have much to disagree on Spending review: parties have much to disagree on
(3 months later)
In the runup to the spending review there appears to have been a Great Convergence between the coalition and Labour on macroeconomic policy, and British politics has lapsed into the narcissism of minor differences. But closer inspection suggests Ed Balls and George Osborne will not shake hands and forge a new consensus.In the runup to the spending review there appears to have been a Great Convergence between the coalition and Labour on macroeconomic policy, and British politics has lapsed into the narcissism of minor differences. But closer inspection suggests Ed Balls and George Osborne will not shake hands and forge a new consensus.
Despite Labour's recent changes in policy, potentially large economic and political divisions will still be apparent. On spending, growth, welfare and the causes of recession, Balls and Osborne have plenty on which to disagree.Despite Labour's recent changes in policy, potentially large economic and political divisions will still be apparent. On spending, growth, welfare and the causes of recession, Balls and Osborne have plenty on which to disagree.
Balls has accepted current spending and borrowing figures announced for 2015-16 as his "starting point", but has not made any commitment on capital investment, saying there is a case in two years' time for still investing more on roads and infrastructure.Balls has accepted current spending and borrowing figures announced for 2015-16 as his "starting point", but has not made any commitment on capital investment, saying there is a case in two years' time for still investing more on roads and infrastructure.
He has also agreed there will be deep departmental spending cuts in the years after 2015-16, but not said if he thinks the remainder of the deficit should be eradicated within the government timetable of 2017-18. Such cuts would entail, as the Resolution Foundation pointed out last week, deeper cuts in the subsequent two years than in any year in the previous parliament.He has also agreed there will be deep departmental spending cuts in the years after 2015-16, but not said if he thinks the remainder of the deficit should be eradicated within the government timetable of 2017-18. Such cuts would entail, as the Resolution Foundation pointed out last week, deeper cuts in the subsequent two years than in any year in the previous parliament.
If Balls decided not to accept that pace of cuts, he would be also saying he does not accept the current government fiscal rules, and is prepared to borrow for longer.If Balls decided not to accept that pace of cuts, he would be also saying he does not accept the current government fiscal rules, and is prepared to borrow for longer.
The shadow chancellor will not show his hand on this until closer to the election, but it's a fair bet that he will likely argue that cuts at the pace set out in the Treasury plan after 2015-16 are unrealistic and self defeating.The shadow chancellor will not show his hand on this until closer to the election, but it's a fair bet that he will likely argue that cuts at the pace set out in the Treasury plan after 2015-16 are unrealistic and self defeating.
He has also argued in the next two years the government should follow the broad advice of the International Monetary Fund and undertake an extra £10bn of capital spending mainly on housing, a move that would require extra short-term borrowing.He has also argued in the next two years the government should follow the broad advice of the International Monetary Fund and undertake an extra £10bn of capital spending mainly on housing, a move that would require extra short-term borrowing.
But that presents him with a political problem. Yesterday he spent much of Treasury questions pointing out that the ONS revealed on Friday that borrowing, on some measures, narrowly rose in 2011-12, and argued this was wrong. Yet he is likely to propose higher borrowing himself claiming that the borrowing he proposes is to create growth, and not fund the cost of failure through higher unemployment.But that presents him with a political problem. Yesterday he spent much of Treasury questions pointing out that the ONS revealed on Friday that borrowing, on some measures, narrowly rose in 2011-12, and argued this was wrong. Yet he is likely to propose higher borrowing himself claiming that the borrowing he proposes is to create growth, and not fund the cost of failure through higher unemployment.
Balls has also not yet said that he will accept the mix of 80% spending cuts and 20% tax rises set out in the coalition deficit reduction plan. He has for instance said he favours a mansion tax, something the Conservatives oppose.Balls has also not yet said that he will accept the mix of 80% spending cuts and 20% tax rises set out in the coalition deficit reduction plan. He has for instance said he favours a mansion tax, something the Conservatives oppose.
Nor has Balls accepted as fixed the departmental totals due to be announced today for 2015-16. That means the ringfencing of health, schools and international development might be opposed by Labour – politically contentious but possibly inevitable since spending in the three departments, according to the Social Market Foundation will represent half of total government spending by 2015-16.Nor has Balls accepted as fixed the departmental totals due to be announced today for 2015-16. That means the ringfencing of health, schools and international development might be opposed by Labour – politically contentious but possibly inevitable since spending in the three departments, according to the Social Market Foundation will represent half of total government spending by 2015-16.
Balls appears to have acknowledged that his plan for a VAT cut to stimulate a consumer led recovery has passed its sell-by date, and the emphasis should shift to capital stimulus as a more effective way to boost growth and create a rebalanced economy.Balls appears to have acknowledged that his plan for a VAT cut to stimulate a consumer led recovery has passed its sell-by date, and the emphasis should shift to capital stimulus as a more effective way to boost growth and create a rebalanced economy.
Osborne for his part has also acknowledged that capital spending needs to be increased by £3bn in 2015-16, but only funded from cuts to current spending. On Thursday the Treasury chief secretary, Danny Alexander, will set out longer-term infrastructure spending for the remaining years of the 2015-2020 parliament.Osborne for his part has also acknowledged that capital spending needs to be increased by £3bn in 2015-16, but only funded from cuts to current spending. On Thursday the Treasury chief secretary, Danny Alexander, will set out longer-term infrastructure spending for the remaining years of the 2015-2020 parliament.
Both sides also accept there should be some kind of cap on long-term structural welfare spending, which accounts for around half of all government spending . This proportion is forecast to rise in coming years, according to Policy Exchange, reaching 56% by 2017-18.Both sides also accept there should be some kind of cap on long-term structural welfare spending, which accounts for around half of all government spending . This proportion is forecast to rise in coming years, according to Policy Exchange, reaching 56% by 2017-18.
But there is no agreement over the level at which the cap should be set, which existing elements should be put "inside" the cap, and the length of time over which the cap is set. Neither Balls nor Osborne has been precise about the benefits that should be placed within the cap, and those that should be labelled as cyclical spending, linked to health of the economy and therefore outside the cap.But there is no agreement over the level at which the cap should be set, which existing elements should be put "inside" the cap, and the length of time over which the cap is set. Neither Balls nor Osborne has been precise about the benefits that should be placed within the cap, and those that should be labelled as cyclical spending, linked to health of the economy and therefore outside the cap.
Osborne will set out more details on Wednesday, but in speeches and interviews Miliband has already indicated that housing benefit and disability benefits would be included within the structural cap, but other benefits such as the jobseeker's allowance – seen as cyclical – would be excluded.Osborne will set out more details on Wednesday, but in speeches and interviews Miliband has already indicated that housing benefit and disability benefits would be included within the structural cap, but other benefits such as the jobseeker's allowance – seen as cyclical – would be excluded.
Significantly, a week ago Balls said he would include pensions in the cap, but moments later added he would keep the triple lock – the commitment that the basic state pension would rise in line with earnings or inflation, whichever is the higher.Significantly, a week ago Balls said he would include pensions in the cap, but moments later added he would keep the triple lock – the commitment that the basic state pension would rise in line with earnings or inflation, whichever is the higher.
But Balls has been a first adopter on a commitment to remove the winter fuel allowance from wealthier pensioners. On Sunday, Osborne for the first time indicated he may follow Balls, saying the Tories "would have to consider the promises we make for the next parliament". Polling this week suggests pensioners themselves recognise they need to share the burden of spending.But Balls has been a first adopter on a commitment to remove the winter fuel allowance from wealthier pensioners. On Sunday, Osborne for the first time indicated he may follow Balls, saying the Tories "would have to consider the promises we make for the next parliament". Polling this week suggests pensioners themselves recognise they need to share the burden of spending.
The big savings in pensions will not come from reducing fringe pensioner benefits but by raising the retirement age.The big savings in pensions will not come from reducing fringe pensioner benefits but by raising the retirement age.
Balls said on Marr: "People are living longer people are going to have work longer. There is a debate to be had on about whether or not we have long term affordability in pensions". Osborne rapidly matched him saying: "I do think the simplest thing we can do is increase the pension age, as we have done".Balls said on Marr: "People are living longer people are going to have work longer. There is a debate to be had on about whether or not we have long term affordability in pensions". Osborne rapidly matched him saying: "I do think the simplest thing we can do is increase the pension age, as we have done".
In a report the Policy Exchange think tank argued both parties needed to be more bold. Welfare spending, it said, had "risen by 133% as a proportion of GDP in the past 50 years". The cap, it argued "has to include the full range of benefits, including pensioner benefits and the state pension. Without this, any proposed cap would be meaningless and fail to recognise the real drivers of rising costs. It's time for an honest conversation with the public".In a report the Policy Exchange think tank argued both parties needed to be more bold. Welfare spending, it said, had "risen by 133% as a proportion of GDP in the past 50 years". The cap, it argued "has to include the full range of benefits, including pensioner benefits and the state pension. Without this, any proposed cap would be meaningless and fail to recognise the real drivers of rising costs. It's time for an honest conversation with the public".
As the options narrow, Balls and Osborne may be getting closer on what to do about the future, but that does not prevent them arguing about the past. In his main line of attack Balls will argue that this spending review is only necessary because Osborne has failed to secure the growth he promised. Osborne will be hoping that this is the last day he talks about cuts.As the options narrow, Balls and Osborne may be getting closer on what to do about the future, but that does not prevent them arguing about the past. In his main line of attack Balls will argue that this spending review is only necessary because Osborne has failed to secure the growth he promised. Osborne will be hoping that this is the last day he talks about cuts.
From Thursday, he intends, the coalition story will only be about recovery, healing and growth.From Thursday, he intends, the coalition story will only be about recovery, healing and growth.
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