The majority of Government spending is now uncontrolled

2013 may well go down as an extraordinary year for many reasons – to take one of them, it looks like being the first time we’ve had capital controls imposed not merely in the single market but in the eurozone (more on which later) – and it also represents a landmark moment for the UK economy. The reason is to be found here in this chart, from the Institute for Fiscal Studies (and based on Budget 2013):

For the first time, the amount the Government spends on uncontrolled, non-discretionary stuff like welfare will become greater than the amount it spends on Governmental departments.

Look at the two coloured lines in the chart: yellow is “department expenditure limits” – that’s the spending which is determined by spending reviews such as the one we’re having this summer. Essentially it’s the sum total of each department’s budget – health, home office, BIS and so on. As you can see, that’s where the spending cuts will be happening over the coming years (according to the IFS projections). The purple line is “annually managed expenditure” (or “annually unmanaged expenditure” as Treasury wags have nicknamed it) which, as well as social security spending, includes local authority self-financed spending and a whole load of other unpredictable, more volatile stuff.

As you can see, the purple line will draw level with the yellow one this year and then, after a brief dip, will overtake it properly in 2016.

Why is this significant? Well, a number of reasons. First it means this summer will bring with it the first Spending Review which will not necessarily cover the majority of total government expenditure. Second, it is a sign that state spending is, by its nature, becoming more unwieldy and less responsive to policy action. Third, it’s a sign that the welfare state is becoming the dominant cost for the Government (well, actually, we already knew that, but it’s yet more evidence).

Which brings me back to my (intentionally-provocative) title. It is half-true, in that AME is far more difficult to control – some would say almost impossible.  When it rises and falls that tends to be due more to economic factors than policy (a downturn which puts more people onto jobseeker’s allowance, for instance). It can, in theory, be done, but cutting welfare involves long-term drip-fed reforms which are difficult to implement. The UK is trying to do this, in the shape of Iain Duncan-Smith’s welfare reforms. But it is an uphill battle. That battle will get more and more important, to judge from that chart above.