The real story behind today's Spending Round

There’s one important chart that overhangs today’s Spending Round – but don’t expect to find it in anywhere in the official documents. It is this one, showing the extent to which welfare and health spending has risen as a proportion of total government spending over the past 50 years.

Welfare/health compared with the total government spending bill. Source: Sky News/IFS/House of Commons Library/OBR
Welfare/health compared with the total government spending bill. Source: Sky News/IFS/House of Commons Library/OBR

In 1950 health and social security payments – the bulk of the welfare state – accounted for about a fifth of total government spending in the UK. Today they account for about a half of total spending.

Now consider the fact that the vast majority of this is either protected or simply ignored by the Spending Round, and it’s hardly a surprise that we’ve seen some brutal, double-digit cuts to various government departments (DCLG, Justice, DEFRA, DCMS) today. Quite simply, the amount of the government spending “pie” accounted for by cuttable, departments is smaller than it has ever been before – so if you want to cut some fat, there’s an ever-decreasing part of the body to cut it from.

The upshot is that the Spending Round (it’s called a “round” this year because it only deals with one year’s spending) is becoming increasingly irrelevant. In technical terms it is supposed only to deal with so-called Departmental Expenditure. In practice, what desperately needs reform is every other part of Government spending.

And you can detect Number 11’s frustration with this from today’s measures. In economic terms, the most significant policies have nothing to do with how much money Theresa May or Vince Cable have managed to safeguard, and everything to do with trying to bring the welfare state back under control.

The most eye-catching of these is the new Welfare Cap, which will kick in from April 2015. In essence, it does for welfare spending what the inflation target is supposed to do for the Bank of England, providing a cap which the Government must try to keep below for spending on certain parts of the welfare bill. State pensions are excluded, though the Treasury argues that these are being reformed separately anyway, through measures including raising the retirement age. There will be a cash figure the Government has to try to keep below, and it will be forced to explain itself to Parliament if it exceeds it. The cap will be “enforced” by the Office for Budget Responsibility, though it won’t have any “teeth” to do anything about it.

Meanwhile, the Round also quietly moves towards integrating health and long-term care – a reform designed not merely to streamline the two (often combative) parts of the welfare state but, again, to try to bring their spending under control. That, after all, is what you need to do if you take that chart above seriously. There’s not much the Government can do about other “uncontrolled” costs like debt interest (lower interest rates helped save the Chancellor money this time around – higher rates are likely to cost him more in the future), which leaves health and welfare.

Clearly today’s Welfare Cap tackles one of those, but is it the right one? OECD research shows that while Britain’s spending on public services in general and health in particular is greater than in most other developed nations, the UK is already one of the less generous when it comes to cash benefits (eg unemployment insurance, disability benefit and all the other stuff we’d traditionally call welfare).


The implication is that cutting welfare payments much further could be far more painful and far less beneficial than cutting spending on healthcare.

Of course, health cuts aren’t possible until the coalition agreement protecting NHS spending expires. But the inexorable logic of the above is that this protection surely looks vulnerable beyond the next election.