As the dust settles, Peter Barnett gives his view of the Spending Review's impact on financial services and the economy in general
So now we know - after all the waiting the axe has fallen - but do these cuts represent a ‘hurricane', a ‘shower' or just a ‘cold wind'? The Comprehensive Spending Review (CSR) published on 20 October provided details of how Whitehall departments will reduce their budgets over the next four years as ministers look to cut spending by £81bn to address the £935bn national debt and £109bn structural deficit.
The Chancellor insists he will stick with budget plans to achieve 77% of the spending cuts, with only 23% delivered through higher taxation. Which commitment will get tested first; to limit tax rises to 23% of the bill, or the size of the bill itself? We will see.
A significant amount of George Osborne's cuts have fallen on public investment, rather than current spending. But there is also an issue of perspective. Many commentators are describing the impending cuts as "savage", "draconian" or a "hurricane", while some are trying to say that it is all a fuss about nothing.
So, who is correct? The answer is both are; government spending is still set to rise in money terms for, even after the cuts, total government spending in 2015/16 will be £60bn higher than it is in 2010/11. In real terms the planned cuts still leave public spending above the level it stood at in 2008/9.
So at one level the cuts are not deep at all. They will essentially just reverse the above-trend growth of public spending that took place under Labour, which means that there will not be a substantial drop in the share of the economy taken up by public spending.
Even after the cuts, in five years the share of public spending in GDP will be just under 40%. This will be well down from its 47% peak, but still well above the recent low of 36% registered in 1999/2000 - which by way some commentators believe we may not see again for fifty years.
It's going to be tough
As it is, removing a structural deficit -a fundamental imbalance in government receipts and expenditures - of nearly 6% of GDP by 2015/16 is going to be tough, though spreading it over a five-year period eases the pain to some degree. To make real progress on that is a job for the next parliament with continued reform of the public sector and public expenditure restraint, combined with sustained economic growth.
Even though the cuts won't impact much before 2012 and go through until 2015, Labour and the unions argue there is not enough growth in the economy to cope with cuts on this scale and raise the spectre of a double-dip recession which will leave us crawling along the bottom of an enduring recession.
They argue that implementing these changes risks unemployment becoming entrenched in some locations and will so fundamentally alter those communities that we spend years trying to repair the damage. They argue that government subsidies should focus on those areas and helping companies bring people back to work and encourage people to look for employment - the advantage of gradualism being that you don't suddenly get lots of people out of work and you give people more time to find work.
As for the Right, the guiding principle behind cuts to the welfare budget seems to be the reintroduction of the distinction between the ‘deserving' and the ‘undeserving' poor. This is not meant to be an absolute distinction, still less one which damns those on the wrong side of it as worthless or inadequate. But it is intended to be a way of making decisions about who is entitled to the state's resources in a time of scarcity.
That is why the coalition is going to target Disability Allowance: the aim is to force 400,000 of those claiming that benefit back into paid employment. They believe the coalition's determination, as part of its communal ‘Big Society' umbrella, to be "tough but fair", is the right way to proceed. But is this ‘fairness' of opportunity or ‘fairness' of outcomes?
This is the nub of the issue. The conversation has to become much more grown-up and involve serious discussion and consensus building around those areas which government could safely pass back to the private sector and those which ‘in the public interest', in terms of access, justice, security and economy, it is unsafe to leave to ‘market forces'. Thus must be paid for out of universal taxation - then they may just command widespread support.
Impact on financial services
The changes in practice around ‘return to work', ‘abolition of DRA' and ‘health choices' agendas, cohere very well with both income protection and medical insurance propositions, and once the new Commission on Care Funding reports we can expect some viable long-term care funding propositions to emerge, in context with pensions reform, care annuities and equity release. Education, information and advice issues will need resolving but overall the product picture is positive, providing the risk profiling and margins work.
But where are the individual customers outside group schemes? For them protection is a marginal purchase and in the face of a very tight labour market, of increased savings rates and debt - pension contributions and graduate taxes - the implication is for lower disposable income for most.
Moreover, it emerged this week that household spending fell in October at its fastest pace since January, while debt levels are on the rise for the first time in nine months. Thus spending on discretionary purchases, such as protection insurance, must come under pressure.
The group most affected look like being married couples with children, on average UK wages, aged 25-40 and unadvised - exactly the target market for the protection gap market and outside RDR. This means many IFAs will soon be facing big decisions around the nature of their business. Do they remain independent, relying on a high net worth clientele, or look to a restricted model for the mass market facing all the issues above? There is a good chance of further consolidation, including amongst providers, so as to get the critical mass required to operate efficiently in this new climate.
So in weather terms, rather than a cold snap, we may be looking at a sustained spell of frosty weather - very tough on small animals and big beasts alike - so get your coat on.
Peter Barnett is a policy adviser in the House of Lords, an Advisory Board member of the Society of Later Life Advisers and Chair of the Continuing Care Conference
