Spending Review: Autumn Statement gives Chancellor Osborne breathing space

Richard Edgar

Former Economics Editor

So how did he do it? The 'Austerity Chancellor' managed to present his spending plans for the next five years in a speech that was peppered with giveaways instead of cuts.

Yet cuts there will be - the state will shrink from 40% of national income today to 36.5% by 2021. Yet how?

It's largely down to good fortune. The economy is doing slightly better than forecast only a few months ago, inflation is a touch lower meanings interest rates are expected to stay lower for longer.

Mr Osborne is aiming for a ‘high wage, low tax, low welfare’ society. Credit: PA

That translates to higher income for the government in the form of tax receipts, lower interest payments on the government's huge debts.

Improving the official calculations (re-doing the maths) means National Insurance and VAT income is higher - a cool £29 billion over the course of the parliament.

In other words, the chancellor has more cash to play with than expected.

After abandoning the politically toxic cuts to tax credits, Mr Osborne will borrow a little more to make up the difference in the early years before people are moved onto Universal Credit which is less generous.

The police, widely expected to see its budget slashed, will be protected after all (although only in cash terms - inflation will erode the value of its income). Similarly, the Foreign Office is spared.

Chancellor of the Exchequer George Osborne with a copy of the Spending Review. Credit: PA

Some departments will see huge cuts - especially Transport where day to day spending will fall by 37%, Energy by 22% and Business by 17%.

The detail of what this will mean to you and me is yet to emerge and may indeed take weeks or months to do so.

And there are some tax rises - primarily an apprenticeship levy on businesses, higher stamp duty on second homes and council tax rises to pay for social care.

Each of these will be unpopular to those paying them but are politically more palatable for Conservatives sensitive (in the past) about being seen as the "nasty party."

Interestingly there are fewer tax cuts than at any time since 2008. A different chancellor than in previous budgets.

Overall, changes to forecasts have given Mr Osborne some very welcome breathing space.

But the fact they changed so much in his favour in the four months since his Summer Budget means that they could very quickly turn against him.