THIS week sees another spending review, looking again at our public finances. This review sets out plans for the first year after the next election – the year 2015/16 – and is important because it sets the trajectory beyond the next election, giving a clear steer of intent to the people who lend us money to keep our public services serving the community.

The Chancellor will seek to find £11.5 billion of savings. This compares with an annual budget expenditure of around £670 billion this year and a budget deficit (the difference between what we spend and what we receive each year in tax receipts) of around £120 billion.

The savings are a tiny proportion of the problem we face. Trying to reduce the budget deficit from £120 billion to zero is the key challenge.

Of course, the remaining part of the deficit needs to be repaired by increasing tax receipts. That’s not the same as increasing tax rates. We need more taxable activity and this is also core to our problems: with significant global economic slowdown, the extra tax receipts are not appearing.

The budget is made up of two main components. One is the annual budgets for departments. This is for things like how much we spend on schools, hospitals, police, the army, etc. The other is for things that are far more difficult to predict – welfare, pensions, debt interest and other variables determined by external factors.

The government, however, within all this has been very clear that there are certain areas that are not up for negotiation.

Health spending has been ring-fenced and has seen an increase over the last few years. Education has also recently been isolated from any cuts and we are, controversially, increasing expenditure on overseas aid (to 0.7 per cent of our budget). But we have also protected groups of people, most significantly pensioners, from any cuts.

This means that, amazingly, overall budget cuts since 2011 have been zero! Whilst departmental budgets have been cut, spending has increased in areas such as pensioner support (rightly, in my opinion).

So our public finances are improving, the deficit having been reduced from £156 billion in 2010/11 to £120 billion now. But the truth is our public finances have been in a mess since long before the crisis.

From 2001 to 2007, during the height of the economic boom (some would say bubble) the previous government was running a deficit of around £40 billion every year. This was at a time when we should have been putting money aside – running a budget surplus – to prepare ourselves for any significant economic downturn (or crises).

But we can’t turn back the clock, so we must continue to deal with our broken and mismanaged public finances as we found them.

CONTACT YOUR MP

  • Email: mark.garnier.mp@ parliament.uk
  • Telephone: 020 7219 7198 or 01562 746771.
  • Write: 9a Lower Mill Street, Kidderminster, DY11 6UU, or House of Commons, Westminster, London