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How can George Osborne find the spending cuts he needs to hit his tough 2020 target?

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This article, written by Paul Johnson, was originally published by the Mail Online on 22nd November 2015 and is reproduced here with the permission of the Daily Mail. 

How can George Osborne find the spending cuts he needs to hit his tough 2020 target?

More even than July’s Budget, the spending review which George Osborne will unveil on Wednesday will set the scene for the rest of this parliament.

He has two big challenges. 

First is the very specific decision over how to respond to the political furore created by his proposed tax credit cuts.

Second is the much broader set of decisions over big cuts to other parts of government spending.

Why the spending cuts? 

The backdrop to these decisions is twofold. 

First, despite having been halved, the deficit does remain very big and needs to fall. But, in addition, Osborne has set himself the very specific target of reaching a surplus by 2019.

Crucially this target is very different to the kind of target he set himself over the last parliament, which was actually quite flexible and adapted to changing economic circumstances. This one leaves no wriggle room, no room for manoeuvre. 

That’s something he may come to regret.

If he is not going to raise taxes, and he seems to have set his face against that, then to meet the target he needs to find some substantial spending cuts.

The first tranche of those were announced in the Budget and included £12billion or so of welfare cuts to come in by 2020, of which the tax credit cuts were the largest part.

What is not often remarked upon is that this represented a clear breaking of a manifesto pledge – the pledge to cut welfare by £12billion by 2017. That won’t happen.

Not too many voices are being raised, though, complaining that he is now being too soft on welfare. 

As we at the IFS pointed out before the election, finding this sort of saving was never going to be easy, and would almost certainly require substantial cuts to tax credits.

What can the Chancellor cut?

But suppose he does want to row back on the tax credit cuts. He then finds himself boxed in by another rule he has set – that he must not break the cap on welfare spending which he announced back in July.

And it’s not clear that replacing tax credit cuts with cuts to other working age benefits, like housing benefit, would be much more politically palatable. What judgement he takes on this will be fascinating to see.

The core of this week’s announcement though will be details of spending cuts to other government programmes. To meet the 2019 target the overall cuts required actually look remarkably modest: just 3 per cent or so across all programmes. That however hides a very uneven picture.

Health spending is due to rise by at least £8billion. Defence spending, overseas aid and, broadly speaking, spending on schools are also protected. Outside of social security these represent some of the very biggest government budgets, with health easily the largest.

These protections then have dramatic effects on what happens to other parts of spending. To achieve that 3 per cent cut overall will require cuts of around a quarter, on average, in the day-to-day spending of the unprotected programmes.

Those are the same programmes on the whole which were cut the most last time round: local government, police, and justice for example. By 2020 some of these budgets could have been halved relative to 2010.

The next round of cuts will be harder than the first

Success in managing cuts so far may point to future success in delivering further cuts of this magnitude. A second round, though, will surely be harder than the first.

The wider environment will also make cuts harder. For example it has not been too hard to hold down public sector pay in recent years because pay in the private sector has also been doing very badly.

As pay rises start to happen in the private sector – and pay is finally rising – continuing to hold down public pay will get harder.

We can expect the usual surprises on Wednesday. Osborne may find some way of softening, or appearing to soften, his cuts.

But make no mistake: we are not yet through a period of radical change in the size and shape of the state.