The first cuts are the deepest

Let’s start off by putting this into perspective. Exciting as the Chancellor’s announcement of 10% spending cuts at seven (count ‘em) Government departments may sound, it amounts to barely more than a drop in the increasingly vast ocean that constitutes the public sector’s annual outgoings.

Consider it: total government spending is running at around £700bn a year. Around half of that is the kind of spending departments can’t directly control: stuff like debt interest payments and welfare payments (the Treasury calls this Annually Managed Expenditure, though it’s the least manageable part of all – more on that later).

Departmental spending, the focus of next month’s Spending Review (which will decide spending totals for 2015/16), accounts for about £350bn annually.* Around £160bn of that is ring-fenced spending, which the Prime Minister has committed not to cutting in real terms: the NHS, schools and international development.

So we’re left with just under £200bn of unprotected departmental spending. Which brings us back to today’s announcement of those seven departments. If you tot them – the Ministry of Justice, the communities element of DCLG, Environment, Foreign Office, Cabinet Office, Northern Ireland Office and the Treasury – their combined size is around £20bn – barely more than 5% of total departmental spending. In other words, what’s been announced today is a big reduction in a comparatively small element of the Government’s budget.

Where does that leave the rest of the unprotected departments – the controversial ones like Defence and the Home Office, not to mention Transport and Business? The short answer is: still facing significant cuts.

The Institute for Fiscal Studies calculated at the time of the Budget a few months ago that these unprotected departments would face average cuts of 6.5%, based on the Chancellor’s most recent sums. Factor in today’s news and the implied average cuts across the rest of Whitehall’s unprotected parts will drop to 6%.

Cuts of that size may well be possible – and one assumes that part of today’s operation was designed to shame the more stubborn ministers into considering deeper cuts. After all, negotiations are still ongoing: the Spending Review itself won’t be announced until June 26^th. However, departments like Defence and the Home Office are both bigger and more sensitive than today’s victims who were, anyway, always likely to volunteer pretty big cuts. Moreover, with the International Monetary Fund having warned earlier this month that the Chancellor’s austerity plan goes too far, they have further economic backing to bolster their argument.

Nonetheless, even if the Chancellor and Chief Secretary to the Treasury Danny Alexander (the LibDem MP in charge of spending) do manage to get the intended cuts out of these departments, there is still a bigger problem: that other uncontrolled half of total government spending. In the years to come, Annually Managed Expenditure will account for the majority of Government spending as the population ages and costs associated with pensions and welfare become larger and larger.

At the Budget, the Chancellor committed to imposing a “forward-looking limit on AME spending”: in other words trying to impose control on the Government’s non-discretionary spending. We will hear more about this next month, but given Chancellor after Chancellor has tried and failed to reduce this element of government spending, whether he stands any chance of success is another matter.

* These are ballpark figures, but then again so are the numbers provided us by the Treasury this morning.