How deep are the cuts, really?

Tomorrow’s public spending review is likely to be presented by all and sundry as cuts of a savagery not experienced since the Second World War.  
It suits the Coalition’s book to appear ruthless. It wants to avert a sovereign debt crisis, keep interest rates down, and avoid (if it can) huge increases in taxation. But a look at the actual figures makes it plain that the cuts are nothing like as savage as generally believed.
As John Redwood MP pointed out in Monday’s Times, current spending on the public sector is actually set to rise, from £637.3 billion in the current financial year, to £692.7 billion in 2014-15. The source for these figures is Table C13 on page 103 of the Office for Budget Responsibility’s Budget forecast, published in June. 
So in cash terms, spending is set to rise by 8.7 per cent. How can this be presented as deep cuts, and widely believed? Because the 2014-15 figure is far less than it would have been under previous spending plans, not far less than it is today. The cuts have been made to future projections, not to today’s spending figure.
Not all items of public spending can be cut: interest payments, contributions to the EU, and social security benefits are all set to rise, by a total of £38.9 billion. Public service pensions will rise by another £4.9 billion, making a total of £43.8 billion.
That means that the total for departmental spending will actually fall in cash terms, from £342.7 billion to £337.7 billion – a reduction of 1.5 per cent. And because two departments, overseas development and health, have had their budgets protected, the impact on other departments will be comparably greater.
Of course, a true figure needs to take into account inflation, which the Bank of England has targeted at 2 per cent a year, or about 9.5 per cent over the period. This means that in real terms departmental spending will decline by 11 per cent, or £38 billion, over four years.
Capital spending will show a much greater proportional fall, from £59.5 billion this year to £44.9 billion in 2014-15, a decline in cash terms of 24.5 per cent.
These are big cuts. But just how big they are depends on where you want to start. In a paper for the Centre for Policy Studies, Tim Morgan has pointed out that public spending rose (at 2010-11 values) from £453 billion in 1999-00 to £697 billion this year, if both current and capital expenditure are included.
The planned cuts, he says, will restore spending in 2015-16 to where it was in 2009 – not a year in which the public sector was denied the cash it needed to function perfectly adequately. And because the economy will have grown during this period, public spending will fall as a proportion of GDP from 47.3 per cent this year to 39.8 per cent in 2015-16.
The Prime Minister almost agrees, except that he says that the cuts, when complete, will bring spending on public services to the levels of 2006.
Most cuts, including the now legendary attack on the public sector made by Mrs Thatcher in the 1980s, are not in reality cuts at all. Spending rose by 44 per cent in real terms in the 18 years of Conservative rule after 1979, from £275 billion to £397 billion (in 2008-09 prices). There was only one year when spending did not rise in real terms.