So where has the money gone then?

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In his latest Telegraph blog, Dan Hannan points out the big deception at the heart of the government’s fiscal strategy – the fact that, in the aggregate, there are no cuts:

The Treasury statistics are unambiguous. Total public spending has risen in every month since the coalition was formed. During the seven months that followed the general election, spending was £23.3 billion higher than during the equivalent period twelve months previously, an increase of seven per cent.

Except that – as we are all very painfully aware – there are cuts. Libraries, leisure centres and day care centres are shutting down. Your local hospital probably is being asked to make £20m in “savings”. And thousands of people really are losing their jobs.

So, as the man says, where is all that money going?

• Debt repayments – the more we borrow, the more we have to pay back and the less we have available to spend on the services people actually want us to provide. Currently, the government’s interest payments amount to around £31bn but the budget forecasts anticipate this rising to £60bn in 2015.
• Regulatory infrastructure – the ‘bonfire of quangos’ did not touch the core of our government’s regulatory infrastructure and it seems likely the government (local and national) will remove direct service before reducing regulatory bureaucracy. In some sectors, such as health and child protection we are likely to see increases in regulatory costs.
• Additional spending directed to schools and the NHS – although it doesn’t sound like it, the money heading to schools and frontline health care is planned to increase. This is partly at the expense of central supports and grants but includes real increases

Still this doesn’t seem to explain the pain – to show why the end of substantial year-on-year spending growth results in actual service cuts rather than an end to expansion? Which brings me to the final problem – inflation.

Public bodies have to budget for inflation. Across many services this can be managed – even removed from the budget – but some costs such as energy cannot be treated in such a way. And, as energy costs shoot upwards, there will be a significant impact on spending. Furthermore, public bodies have a range of contracts – PFI contracts, for example – that build in inflation making it harder for those bodies to constrain increases (and, incidentally, contributing to the continuance of higher than trend rates of inflation).

Which rather explains how we can have real increases in total spending while at the same time seeing serious reductions in front line services. Link this to the Labour Party’s penchant for using cuts as a political tool – the budget of spite in Manchester being an example – and we have something of a ‘cuts nightmare’.

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