–UK Govt Spending Review: No Let Up In Fiscal Tightening
–But Review Detail Shows Benefit Cuts, Efficiency To Take More Strain
–Analysts: Benefit Spending Less Predictable Than Other Public Spending
–Slight Increase In Risk UK Public Finances Missing Forecast
–Government Total Spending A Little Higher Than Forecast In June Budget
–Osborne Brings Spending Dept. Cuts Into Line With Labour Plans

LONDON (MNI) – By significantly softening the planned spending cuts
facing government departments and putting more of the strain of
austerity on welfare and on efficiency savings, UK Chancellor of the
Exchequer George Osborne has raised a question mark over the public
finance outlook.

FISCAL OUTLOOK LESS CERTAIN

Osborne told the House of Commons today that he was sticking with
his plan to eliminate the structural budget deficit over the next 4
years – as already pledged in his June 22 emergency budget – but he
diluted the impact of the austerity drive on so-called ‘unprotected’
government departments.

The latter had been expecting to face an average cut of around 25%,
but this has been diluted by Osborne to just 19% – a level of cuts no
greater than that to which the previous government had been committed.
This bid to politically outflank the opposition may prove fiscally
flawed in practice.

To compensate for the lower level of departmental cuts, Osborne
increased the amount he plans to save from cuts in welfare and from
efficiency savings. The problem is that welfare spending is of its
essence highly cyclical while efficiency savings have been notoriously
elusive in the past.

The big picture was that the figures in the Spending Review were
close to the public spending totals set out in the June Budget, with
current expenditure plans unchanged and total spending a little higher.
The main figures for government expenditure that the Bank of England and
Office for Budget Responsibility plugged into their forecasts after the
Budget will not, therefore, have to be altered much.

The detailed Spending Review data showed the government’s current
spending totals were unaltered from the June Budget for all years from
2010-11 through to 2014-15. Total managed expenditure (TME), the
government’s envelope spending number which includes current and capital
expenditure, however, is projected to be higher than previously
forecast.

CAPITAL SPENDING CUTS ALSO SOFTENED

TME is shown rising above the June Budget totals by a couple of
billion pounds a year each year from 2011-12 through 2014-15. In total
from 2010-11 through to 2014-15 TME is a cumulative stg8.5 billion
higher than the June Budget forecasts showed. The reason TME is higher
is that the government has held back on capital spending cuts.

The Treasury Spending Review documents says it has adjusted “the
capital envelope to ensure that capital projects of high long-term
economic value are funded.”

The upshot is public sector gross investment will be stg2 billion
higher in 2011-12 and 2012-13, and stg2.3 billion higher in 2013-14 and
2014-15 than previously.

As the government’s fiscal goal is to eliminate the structural
budget deficit by 2015-16 these changes makes no difference to its
chances of meeting its goal – capital spending is excluded.

Aside from the increased capital spending projections, the other
news in the Spending Review is that benefit spending cuts, and
efficiency savings, will shoulder more of the burden and departmental
spending cuts less of it.

Osborne announced a raft of changes to the benefits system which he
said would “save the country stg7 billion a year.”

That allowed him to pull a political rabbit out of the hat –
protecting the schools budget from any cuts and saying average cuts over
the next four years in those government department facing reductions
would be just 19%, in line with Labour’s plans.

WELFARE CUTS LACK PREDICTABILITY – MAY POSE CONSUMPTION THREAT

The textbook problem with using benefit cuts to achieve public
spending reductions is benefit payment are directly linked to what
happens to the broader economy. Higher-than-expected unemployment can
result in higher payouts even if payments per person are cut.

“Unlike more easily identifiable spending cuts such as a naval ship
or a new school, reducing welfare payments is traditionally more
difficult to both achieve and forecast,” Hetal Mehta, economist at Daiwa
Securities said in a note.

“If growth turns out to be weaker than the Office for Budget
Responsibility (OBR) is forecasting, as we expect, the ensuing reduction
in tax revenues means that borrowing will likely overshoot the OBR’s
projections in the coming years,” she added.

Jonathan Loynes, at Capital Economics, said the switch to larger
benefit reductions “might point to a bigger short-term adverse effect on
household spending.”

The OBR’s forecasts at the time of the June Budget showed private
sector job creation outstripping public sector job losses.

On Wednesday, Osborne restated the OBR prediction that there would
be a reduction in the public sector headcount of 490,000 over the next
four years, but suggested this could be overcome, with the economy
seeing 178,000 jobs created in the last three months.

The OBR’s growth forecasts, however, are above the current
consensus forecast and above those of such international bodies as the
International Monetary Fund and some analysts have expressed skepticism
over the OBR’s employment forecasts.

While the Spending Review shows the UK government firmly committed
to the broad thrust of deficit reduction, but at the margins it has
raised some serious doubts as to whether its borrowing targets can be
achieved.

–London newsroom: 4420 7862 7491; email:
drobinson@marketnews.com/dthomas@marketnews.com

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