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Cuts of £11bn, spending of £100bn. Can we be spending more than we are saving in an age of austerity?

By David Burridge 

In the last two days the Government has announced both their spending plans for the financial year of 2015/16 and their plans for capital investment. Chancellor George Osborne has announced cuts of £11.5bn whilst also announcing £100bn worth of capital investment. The obvious question here is how, in a so called “age of austerity”, can we be spending more than we are saving?

The reason is these are two completely different yet very similar announcements. Spending plans form half of the annual “budget”, the other half being comprised of taxes whereas the capital investment plans are not included in the “budget” and so do not represent an increase in public borrowing.

Another way to think of this is to consider your annual income vs expenditure on the one hand and then money you might invest into a new car which will more likely come from your savings on the other. You might rationalise to yourself that it is ok to spend some savings on the car as the car will enable you to get to work and earn money to live. Essentially the same logic applies; the government doesn’t add money spent on capital investment to the annual surplus/deficit calculations as the argument is that in the long run the added infrastructure essentially pays for itself. By building faster rail services, more business is facilitated for example.

Now we’ve cleared that up we can ask what was actually announced and will it affect you?

Well for starters the announcement concerns the financial year 2015/16 so it’s not of immediate concern. The next general election is scheduled for May 2015 and so these spending plans will only be in force for a month or two before a new political party may or may not be elected. Labour have said they will not change the plan should they be elected but whether this indeed is the case remains to be seen.

In amongst some rather obvious statements from the chancellor, “The eurozone crisis, oil crisis, and banking crisis have had negative effects on Britain” (You don’t say!) there were some interesting policy announcements:

  • £5bn of savings to come from the ever mysterious “Efficiency savings”
  • Public sector pay rises to be limited to 1% and then reduced to zero the following year
  • Local government department budgets to be reduced by a whopping 60%
  • 144,000 public sector workers to be laid off
  • Heath, education and foreign aid budgets to remain “ring-fenced”
  • An increase in the intelligent services budget of 3.4%
  • Loss of winter fuel payments for overseas pensioners

[If you’re really keen you can find the official thing here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209036/spending-round-2013-complete.pdf]

Nothing revolutionary there and nothing that will bear too much upon the average individual unless of course you are a public sector worker in which case there is some genuine cause for concern. Let’s also not forget if you’re a pensioner living in sunny Spain concerned about your heating bills then you too will be affected.

In Thursday’s capital investment announcement it was announced that infrastructure investment would be spent primarily on rail and road funding, (£30bn and £28bn respectively) with money also set aside for new houses (£3bn), school building repairs (£10bn) and flood defences (£370m). With £50bn of investment to occur in 2015/16 and then a further £50bn to occur between 2016 and 2020.

Whilst £100bn may seem like a lot of money to be spending at any time let alone a time when many are going without, investment is inherently good for the economy encouraging what we economists refer to as the “multiplier effect”. The Government’s decision to build new houses for example directly creates work for construction companies who then create work for their suppliers and contractors who in turn create work for their suppliers, each of which pays their employees who then proceed to spend their wages etc. Additionally the new houses in an area encourage investment from local businesses boosting the local economy and creating jobs. Nonetheless the shadow chancellor says it is now we need to be spending and not in 2015/16 and it is hard to argue that he doesn’t have a point.

To end on some good news it was today announced that the “double dip recession” we all bemoan regularly didn’t actually occur as the figures for growth in Q1 of 2012 were flat not -0.1% as previously thought.

Cover photo used under Creative Commons: http://www.flickr.com/photos/altogetherfool/3543149882/

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