66 views
Sustainable Economy > Published by Will Straw, October 25th 2010 at 9:02 am

Spending review slashes £60bn from growth

Print Friendly

Both David Cameron and Ed Miliband make speeches today on growth to the Confederation of British Industry. The impact of any pro-growth policies will, at best, offset the negative impact on growth of the spending review which is set to impact 490,000 public sector jobs and a further 200,000 in business and financial services. Analysis from Left Foot Forward shows that last week’s Spending Review will remove around £60 billion from the economy.

Last week the Institute for Fiscal Studies broke the Government’s plans down into tax rises, public service cuts, capital investment cuts, and welfare cuts. By plugging in multipliers prepared by the independent Office of Budget Responsibility, it is possible to show that the Coalition’s spending plans will take £59 billion from growth. By comparison Alan Johnson’s plan, which stuck to the timetable set out by Alistair Darling but put a greater emphasis on tax, would have impacted growth by the lower figure of £34bn.

The October Spending Review – which announced a greater focus than George Osborne’s June Budget on welfare cuts to reduce the impact of cuts on public services and investment – mitigated the impact of cuts by only £2bn. By contrast, Alan Johnson’s new approach reduced the impact on growth from £40bn in Alistair Darling’s plan to £34bn.

The figures on public service cuts clearly contradict George Osborne’s claim that:

“And because of our tough but fair decisions to reform welfare, and the savings we’ve made on debt interest…

“… I am pleased to tell the House it has been possible – and the average saving in departmental budgets will be lower than the previous Government implied in its March Budget.”

Alistair Darling mooted £44 billion of cuts to public services and capital investment compared to George Osborne’s £53 billion. Alan Johnson reduced Labour’s number to £34 billion.

  • http://twitter.com/averyps/status/28670656755 Phil BC

    RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/shamikdas/status/28670706218 Shamik Das

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4 http://myloc.me/drPv7

  • http://twitter.com/jordanbhall/status/28670906738 Jordan Hall

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/houseoftwits/status/28671137041 House Of Twits

    RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/spiller32/status/28671194933 Emma Poole

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/c_a_jonestechno/status/28672877269 CAROLE JONES

    Review slashes £60bn from growth http://bit.ly/cpHSG4 stupid man!

  • http://twitter.com/falseecon/status/28674358265 False Economy

    Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/othertpa/status/28674438960 Other TaxPayers Alli

    RT @@FalseEcon Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/guyaitchison/status/28675026175 GuyAitchison

    RT @FalseEcon: Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/johnnycov/status/28675123105 John Coventry

    RT @OtherTPA: RT @@FalseEcon Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/tamsinchan/status/28675173173 safefromwolves

    RT @GuyAitchison: RT @FalseEcon: Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/kindjourneys/status/28675706793 Elly M

    RT @FalseEcon: Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/goodoldmj/status/28677750114 Martin Johnston

    surprised? RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/malarky67/status/28678528884 StephenH

    RT @leftfootfwd: Spending review slashes £60bn from growth http://bit.ly/aMVJrI

  • http://familiesagainstnationaldebt.wordpress.com Families Against National Debt

    Will, yet again you have failed to acknowledge the existence of the private sector. It may grow faster thanks to the cuts – at least, so says the ITEM club, who have just upped their UK growth forecasts, pointing out that companies are sitting on a £100 bn cash surplus and that government “has bent over backwards to create business-friendly conditions”, which will allow them to invest, confident that lower debt means lower interest rates and taxes in the long run. Dividends are growing again. Exports are growing. The private sector created 343,000 new jobs in the first half of this year. I don’t – remotely – claim that this is some sort of unarguable case. I ask you not to ignore it, to engage with it.

    Also – headlining £60 bn? When AJ proposed £34 bn on your workings? Say £25 bn, and say “assuming equal private sector performance in both scenarios” and you have yourself a case.

  • http://twitter.com/chukaumunna/status/28682363364 Chuka Umunna

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/bevaniteellie/status/28682425622 Ellie Gellard

    RT @ChukaUmunna RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/weldonwk/status/28682777544 weldon kennedy

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/tommilleruk/status/28682789798 Tom Miller

    RT @BevaniteEllie: RT @ChukaUmunna RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/yorkierosie/status/28682902567 yorkierosie

    RT @BevaniteEllie: RT @ChukaUmunna RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/unslugged/status/28682913908 unslugged

    Gidiot Osborne thinks 53 is lower than 44. And he's running our economy. http://bit.ly/cXgUO2 #godhelpus

  • http://twitter.com/yorkierosie/status/28682934541 yorkierosie

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/andrewjazaerli/status/28682961970 Andrew Jazaerli

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/maczar12/status/28683274564 Maureen Czarnecki

    RT @BevaniteEllie: RT @ChukaUmunna RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/nataliewh/status/28683342500 Nat

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/familiesand/status/28684909092 Neill Harvey-Smith

    FAND response to @leftfootfwd: Spending review slashes £60bn from growth http://bit.ly/aMVJrI

  • http://twitter.com/darrenadam/status/28685766446 Darren Adam

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/northerntuc/status/28695224064 Northern TUC

    RT @FalseEcon: Spending review slashes £60bn from growth http://bit.ly/cpHSG4 (via @leftfootfwd)

  • http://twitter.com/subgrenadier/status/28698290775 Aizat

    Spending review slashes £60bn from growth | Left Foot Forward: David Cameron and Ed Miliband make speeches today o… http://bit.ly/aitKmH

  • http://www.leftfootforward.org/2010/10/camerons-cashless-industrial-policy/ Cameron’s cashless industrial policy | Left Foot Forward

    [...] Cameron’s speech today to the CBI avoided mention of the direct impact on growth of the Coalition’s rapid deficit reduction plan. It did appear, however, to announce a [...]

  • http://socialisteconomicbulletin.blogspot.com/ Michael Burke

    Will, it’s even worse than that. The OBR has the same multipliers as the National Audit Office, except for capital investment which the NAO puts at 1.4 and the OBR reduces to 1. This is not supported by the literature cited by the OBR in the June 2010 Budget.

    This would make the Darling plans £6.9bn worse in reality, the Johnson plan £3.9bn worse, the Osborne (Oct) £6.8bn worse and the CSR £7.7bn worse.

    On all the multipliers, the overwhelming bulk of the literature suggests they are much higher when the output gap is high, as now.

    Crucially, and this point is often ignored or overlooked, the negative effects from a one-off fiscal contraction can persist over many years. Both these OBR and NAO estimates are first-year effects only.

    @ 1. The existence of multipliers is precisely an attempt to gauge the effect on the private sector- the public sector isn’t mutiplying itself.

  • Will Straw

    Families Against National Debt – I owe you a response from your previous comment so let me kill two birds with one stone. Your caveat is the right one. There is no empirical evidence that a more rapid fiscal consolidation will make the private sector behave differently. Ricardian Equivalence, if it exists at all, is a long-term phenomenon and we are dealing with the short term pain of unemployment and falling living standards. Indeed, precisely because of the multiplier effect, a rapid retrenchment is likely to depress the private sector. The PwC analysis mentioned in the Will Hutton piece I linked to indicates this point.

    Michael – Thanks for flagging this. As before, I chose the OBR multipliers since Tories are unable to shoot the messenger when I do so. In previous posts, I’ve linked to your previous comments to outline the problems with using them. I should have done the same in this post.

    All the best,

    Will

  • http://twitter.com/mswigsy/status/28716002540 Wendy Maddox

    RT @leftfootfwd: Spending review slashes £60bn from growth http://bit.ly/aMVJrI

  • Ash

    Will -

    I’m confused about certain figures that don’t show up here.

    Most importantly: if the economy would grow by an additional £25bn under the Johnson plan, what contribution to deficit reduction does that make? (How much does the tax take go up? How much does the welfare bill go down?)

    It’s not as if you can work out how much a plan would cut the deficit by, *then* work out how much the economy would grow under that plan (as if that’s a separate question); surely you need to work out how much the economy would grow under a plan in order to arrive at a figure for the amount of deficit reduction it achieves?

    (This seems important, because every £1bn of deficit reduction achieved through growth is £1bn of cuts and/or tax rises you don’t need to make; that’s the essence of a ‘growth vs cuts’ narrative.)

    The other missing figures: is Labour actually opposed to the Government’s restriction of pension tax breaks (£4bn) or action on tax avoidance & evasion (£7bn)? That seems awkward, to say the least.

  • http://twitter.com/nextleft/status/28724393670 Sunder Katwala

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/mswigsy/status/28725390108 Wendy Maddox

    RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/jack_scott/status/28823979180 Jack Scott

    RT @BevaniteEllie: RT @ChukaUmunna RT @leftfootfwd OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4

  • http://twitter.com/falseecon/status/5587965233340416 False Economy

    The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/jruddy99/status/5588368196894720 John Ruddy

    RT @FalseEcon: The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/othertpa/status/5588573172535297 Other TaxPayers Alli

    RT @FalseEcon The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/mydavidcameron/status/5588811916513280 MyDavidCameron

    RT @FalseEcon The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/imstillred/status/5588950861217792 Keith White

    RT @leftfootfwd: Spending review slashes £60bn from growth http://bit.ly/aMVJrI – So much for the Tories "private sector led growth"

  • http://twitter.com/frdragonspouse/status/5589055836266496 Jill Hayward

    RT @OtherTPA: RT @FalseEcon The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF # …

  • http://twitter.com/andy_s_64/status/5594026765975552 Andy S

    RT @FalseEcon: The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/agthompson/status/5594102968090627 Alasdair Thompson

    RT @FalseEcon: The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/hangbitch/status/5594228671389696 Kate B

    RT @FalseEcon: Spending review will depress growth by £60bn. That’s £1000 for everyone http://bit.ly/bPhSpF #neverhaditsogood > Gah

  • http://twitter.com/hazico_jo/status/5601722487541760 Hazico_Jo

    RT @FalseEcon: The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/boredlondongurl/status/5617865566724096 Melissa Nicole Harry

    RT @FalseEcon: The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/samtarry/status/5624394349023232 Samuel Tarry

    RT @FalseEcon The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood

  • http://twitter.com/lisaansell/status/5624465329225729 Lisa Ansell

    RT @SamTarry: RT @FalseEcon The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF # …

  • http://twitter.com/ldtuc/status/5640312898715648 L DTUC

    RT @OtherTPA: RT @FalseEcon The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF # …

  • http://twitter.com/celynwales/status/5691553460789248 Celyn

    RT @FalseEcon: The spending review will depress growth by £60bn. That’s £1000 for everyone in the UK http://bit.ly/bPhSpF #neverhaditsogood