“The coalition’s cuts are modest, not enormous. In 2015, this government will still be spending more than when it came to power, and in real terms the cuts amount to only 4%.” Mark Littlewood, Director, Institute for Economic Affairs, 19 November 2010.

Background

Though part of a defence of Lord Young's argument that we have 'never had it so good' the above take on the reductions in public spending raise an important point of their own.

Despite the media frenzy and political protest, are these cuts really going to be all that bad? After the comment was flagged up by Full Fact reader Neil Lawrence, we decided to take a closer look.

After all if the Government is set to be spending more than when it came to power, perhaps things won't be as bad as they have been portrayed in some quarters.

Analysis

Coming first to the point that the Government will be spending more in 2015 than it did when it took office, this is true but only when nominal terms are considered.

Figures from last month's spending review show that total Government spending for 2010-11 is an estimated £696.8 billion, and is forecast to be £739.8 billion in 2014-15.

Full Fact has already looked in greater length at why real terms figures need to be used. Indeed if the claim read “In nominal terms the Government will still be spending more than when it came to power.” there would be no reason to dispute this.

As it is though, the second part of the claim challenges the first, as a four per cent real terms cut would require the Government to be spending less than when it took power. This useful graph of the real terms changes in total spending from the BBC's Stephanie Flanders demonstrates.

Beyond the nominal/real terms debate, there is less contention about the four per cent figure.

When Oxford University’s Centre for Business Taxation calculated the inflation-adjusted figures for total spending, based on the June Budget, they forecast a 3.6 per cent real terms cut in spending.

Of course, the scale of real terms cuts only becomes clear when the rate of inflation in the economy is known, so different inflation assumptions produce different projected real cuts.

For instance, the Adam Smith Institute produced figures working on the assumption of the Bank of England's 2 per cent inflation target that showed, were this target met, real cuts would be around 1.5 per cent.

So if total cuts appear small in percentage terms, what was all the fuss about? Taking a figure for overall spending disguises a great variation in how the cuts will fall.

Splitting Total Managed Expenditure into Annual Managed Expenditure (AME) which is things like social security benefits, tax credits, and debt interest, and Department Expenditure Limits (DEL) which is the amount of spending allocated to Government departments, a more nuanced picture emerges.

AME will continue to rise even in real terms, thus offsetting the cuts that will hit Government departments without ring-fenced budgets.

Looking at these budgets as a whole the Institute for Fiscal Studies estimated that following the Spending Review such spending would be 11 per cent lower in 2014-15 than in 2010-11.

Turning to specific departments the figures show cuts of more than 25 per cent to the budgets of the Home Office, as well as the Justice, Business and Environment departments.

Breaking the figures down by Capital and Current spending also shows a divergence in where the cuts will fall.

Even in nominal terms capital spending will fall from £59.5 billion to £47.1 billion between 2010-11 and 2014-15. Putting these numbers through the Treasury's GDP deflators, this amounts to a real terms cut of over 25 per cent.

Current spending will rise in nominal terms from £637.3 billion to £692.7 billion, which depending on inflation assumptions could result in a slight rise or a slight fall. Clearly, the balanced budget will not be achieved by balanced cuts.

Conclusion

Analysing the validity of the claim from Mark Littlewood there is little to dispute with the four per cent figure given for total cuts, even if this does undermine the assertion that the Government will be spending more in 2014-15 than when it came to power.

The problem is when analysing how these cuts play out, there is more to look at than simply a “modest” four per cent.

The significant reductions in capital spending, and in the budgets of certain departments will be significantly more than this, and are only offset in the figure for total reductions by the increase in spending on things like debt interest and pensions.

Given such disparities between different aspects of the components of public spending it is understandable that they would be viewed by the Centre for Business Taxation as a 'spending reallocation' rather than a spending cut.

But despite this, and the relatively small overall cut, the changes were still characterised by the Institute for Fiscal Studies as the tightest since the Second World War.