Osborne: government departments face greater austerity after 2015 without welfare cuts

In his 2012 budget Mr Osborne laid out figures showing that on average departmental expenditure limits will fall by 2.3 per cent in real terms between this year and 2014-15.

Under current policies, he indicated, that cut would have to be hiked to 3.8 per cent for 2015-16 and 2017-18 to hit his targets for deficit reduction.

The budget book states that just to keep DEL cuts at the current rate in 2015-16 the Treasury would need a £6.6bn cut in  “annually managed expenditure” – which mainly comprises social security, tax credits, and public sector pension payments. In 2016-17 that cut would need to be £10.5bn.

The book explains that annually managed expenditure is projected to continue to grow in real terms after this spending review period. “In the next spending review, any reductions in AME will lessen the reductions required from DEL,” it states.

“The biggest component of AME is welfare spending (social security and tax credit expenditure). Most other items of AME are either non-discretionary (e.g. debt interest) or are self-financing.”

It adds: “[In] the absence of policy change, DEL will continue to see significant real reductions in 2015-16 and 2016-17. Any new policy proposals within DEL that require funding beyond this spending review period will further reduce the resources available elsewhere.

“The government will be examining the cost drivers for all areas of public spending, and identifying the further reforms needed to deliver a sustainable welfare system and public services within the resources available.”

Health expenditure has been relatively protected from cuts in the current spending review period, with the department’s budget forecast to be effectively frozen up to 2014-15. However, rising costs and demand for services has meant the NHS has had to undertake an unprecedented £20bn efficiency savings drive to operate within this limit.

The independent Office for Budget Responsibility’s latest economic forecast, published alongside the budget, maintained its forecast for the central “GDP (Gross Domestic Product) deflator” measure of inflation at 2.5 per cent for 2013-2016. However, its forecast for inflation this year was revised slightly, to 2.5 per cent, down from the 2.8 per cent it predicted in the autumn.