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The Spending Review Explained In Five Charts

He has ploughed a furrow as the austerity Chancellor but this Spending Review is where the cuts really begin.

Here's what the Chancellor is faced with:

:: Austerity Mark I

It's worth remembering that contrary to what you might have thought, the UK's austerity over the first term of George Osborne's Chancellorship was actually about par for the course for the rich world.

As you can see from this chart, the UK's reduction in its cyclically adjusted budget (in other words, borrowing, adjusted for the ups and downs of the wider economy) was about as fast as New Zealand's, and was far less severe than that imposed in, for instance, Spain, the US, Portugal or Greece.

In other words, although George Osborne played up his austerity credentials in his first term, he actually delivered far less in the way of spending cuts than many other developed economies.

:: Austerity Mark II

However, in his second term, the Chancellor is planning far deeper cuts than in any other major economy. This is the big overarching thing to bear in mind about the 2015 Spending Review: it is the moment when Britain embarks on the real austerity.

Although a little more than half of the cuts are now done, Britain will, from hereon, be cutting further and faster than anyone else.

:: DEL vs AME

Government spending is, for accounting purposes, split into two parts: departmental spending and something called Annually Managed Expenditure (AME).

AME is the stuff the government tends to find it harder to control: welfare spending, debt interest payments - the things it is legally bound to pay.

Normally AME is not covered by these spending reviews, which tend to happen every three years or so. Instead the spending review focuses on departmental spending – Departmental Expenditure Limits (DEL) as they're known.

But here's the thing, in recent years, as welfare and pensions have become more and more expensive, AME (that "uncontrolled" part of government spending) has become bigger than departmental spending.

So the chunk that the Chancellor can actually control is getting smaller and smaller. This is a totally new development, and is another symptom of a bigger problem confronting the Chancellor - the ballooning cost of welfare and pensions.

:: Social Security Spending

When people talk about welfare spending, they typically imagine it is largely unemployment benefits for those on the dole.

The reality is that the vast majority of social security spending is on the state pension and other pensioner benefits. And as this chart shows, spending on such things has increased rapidly in recent years.

However, the other fastest growing chunk of benefits spending has been on in-work benefits, especially on tax credits, as you can see from this chart.

The Chancellor's proposals to cut those benefits abruptly have been so unpopular, and have been so directly challenged by the House of Lords, that he is having to change his plans.

So while the spending review was supposed to be purely about departmental spending, it will also come alongside a beefed-up Autumn Statement which is expected to include measures to tone down the severity of those tax credits cuts.

:: Total government spending and receipts since 1948

At the moment the Government spends an annual cash amount equivalent to about 40% of gross domestic product. That is about par for the course based on the past half century or so.

However, the amount the Government gets in tax receipts is considerably lower: about 36% of GDP. It is the gap between these two lines that most concerns Mr Osborne: as long as tax revenues are outpaced by spending, the Government needs to borrow and the national debt increases.

The spending cuts being imposed as part of the spending review are a key part of that story.

But it's worth noting that the fall in public spending as a % of GDP (the blue line) is still slightly more gradual than it was in the early 1980s under Thatcher, and the eventual resting position in 2020 (about 36% of GDP) is still a touch higher than it was during the last Labour government.