–Treasury Say Any ‘Reprofiling’ Of Cuts Will Be Just ‘Tinkering’
–IFS Says End Point Of Budget Plans Will Be Same As June 22 Budget

LONDON (MNI) – The Spending Review to be announced by the
government on October 20 will be a landmark in establishing the fiscal
credibility of this government which will want to show that it is
sticking with the broad outline of its ambitious austerity plans
announced on June 22.

Most analysts agree that spending cuts will be within the broad
parameters set out by Chancellor of the Exchequer George Osborne at the
time of the June 22 Budget. This entails deep cuts, put any anywhere
between 25-40% in comparison to the previous administration’s plans, for
some of those departments which have not been specifically protected
from fiscal tightening.

Press reports have made much of the idea that cuts in major public
investment contracts could be ‘reprofiled’ because of the sometimes
stiff penalties involved in cancellation of long-term infrastructure
projects. It still looks likely, however, that the aggregate reductions
will conform with the government’s overall spending cut pledges in the
June Budget.

The Spending Review will cover the four fiscal years from 2011/12
to 2014/15. The high profile fiscal goal of the June Budget was to
eliminate the structural budget deficit a year later than this, by
2015-16, with the goal for 2014-15 “to eliminate the bulk of the
structural deficit through plans for additional consolidation of stg40
billion per year.”

Bank Of England Governor Mervyn King in May welcomed the fiscal
tightening plans as much-needed and market-calming moves from the new
Conservative and Liberal administration.

There has been a fairly explicit trade-off between fiscal austerity
and monetary accommodation.

Prime Minister David Cameron told a press conference at the start
of this week that “actually it’s monetary policy that is a better lever
in terms of trying to make sure that the economy is progressing and
demand is growing.”

“So I have always been a fiscal conservative and a monetary
activist,” Cameron added, citing the IMF as a key supporter of just such
a policy mix.

In public comments Government ministers have continued to make the
case for fiscal austerity and in recent days the administration has
announced the withdrawal of child benefit for top rate taxpayers and tax
allowances on pension contributions by top earners. The latter will
start to flatter the public finances as of April 2011 and so may ease
the amount needed in terms of immediate cuts in departmental spending.

Gemma Tetlow, senior research economist at the Institute for Fiscal
Studies, says the Spending Review “will confirm spending plans by
2014-15.”

She makes the key point that while the Treasury will stick to the
end-point target for 2014-15 for the public spending cuts set out in the
June Budget, it could allow some changes in how these pan out year by
year.

The Financial Times article which sparked talk about ‘reprofiling’
spending cuts also made this point. The report suggested the Treasury
had encountered difficulties delivering the early cuts according to
timetable but there was no suggestion of shifting the end point.

While the FT article led to speculation of substantially smaller
cuts in the early years of the Spending Review period than planned in
the Budget, Treasury officials have downplayed the likelihood of
substantial reprofiling.

As economists at Barclays Capital said in a note – “We understand
from the Treasury that although some re-profiling is possible, it is
unlikely to result in a materially different path for government
demand.”

BarCap UK economist Simon Hayes said that the Treasury had
assured him any ‘reprofiling’ of plans in the early years for fiscal
tightening would be mere ‘tinkering’. It will, therefore, not be of an
order to have any impact on the wider economy outlook or impinge on BOE
policy thinking.

Hayes points out that – in any case – the phasing of austerity has
been closely thought through by the government in that the tightening
due for 2011-12 relies heavily on tax increases and cuts in capital
investment. The latter is easier to cut than current spending and so
would help the government establish credibility in its austerity plans
in the early phase and so gain the trust of the markets.

By the time, the politically more difficult cuts in some areas of
departmental spending are implemented, the government would have form
and – if it’s lucky – even have some good news on the economy under its
belt.

The Spending Review should make it very clear if there has been any
reprofiling – it will not be possible to conceal any such move – making
it a dangerous game for the government to play with the markets if it is
tempted to delay or dilute its plans.

The Spending Review results to be released on Wednesday will give
the Departmental Expenditure Limits and Annual Managed Expenditure,
which combined give Total Managed Expenditure, and this can be compared
transparently with the June Budget numbers.

Tetlow said that on a department-by-department basis, there was
still considerable uncertainty over some departments’ likely
settlements. Overall settlement numbers look likely to be largely in
line with the June budget plan.

The prime minister and deputy prime minister have repeatedly
stressed how tough the spending round has been in terms of the
nitty-gritty negotiations with key spending departments. The tough
rhetoric on the spending round has been credited with helping to bring
Gilt yields down to historic lows and the government will not want to
jeopardise that achievement.

Deputy PM Nick Clegg noted Friday in comments to a north country
audience that the spending cuts had been ‘hard to swallow’ on the part
of some departments, typical of the kind of tough comments ministers
have been spraying around of late.

The government has pledged to ensure real terms increases in health
spending and to meet overseas aid targets, while defense and education
are expected to face substantially lower cuts than other departments.
But, despite that, the Ministry of Defense has been restive about the
impact of the cuts on the UK’s current commitments.

–London newsroom: 4420 7862 7492; email:
dthomas@marketnews.com/drobinson@marketnews.com

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