Markets approve of the spending review

The chancellor, George Osborne, set out his plans to mend the UK public finances this week. And the markets' reaction? Positive.

George Osborne set out in detail this week how he plans to "restore sanity" to public finances. The government aims to cut more than £80bn from spending over the course of the parliament in order to slash the budget deficit from 10% to 2%. We face "bigger and more sustained" cuts than any since World War II, said Chris Giles in the FT.

With health and overseas aid ringfenced, and the schools budget receiving a small real spending increase, other departments face a major squeeze. Local government will suffer cuts of almost 30% by the end of the parliament; the Home Office, Justice Department and Foreign Office lose 24%. The police force will have 16% lopped off. On top of the £11bn saving on welfare announced in the June budget, Osborne is targeting a further £7bn a year in savings from reducing benefits. Around 490,000 public-sector jobs will go by 2014/2015.

What the commentators said

Osborne has "found it much more difficult" to cut departmental spending than he anticipated, said Jeremy Warner on Unprotected government departments will now see average real cuts of 19% over the next four years, less than the 25% mooted in the budget and 1% lower than the figure targeted by the previous government.

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The difference will be made up by the new reductions in means-tested benefits. One worry, however, is the stress on back office reform and efficiency savings in lowering departmental spending. "Historically, such savings are hardly ever achieved."

Markets, however, have been "reassured" that the government is sticking to its plans, as Fidelity's Aruna Karunathilake pointed out. There had been talk of delaying or diluting the cuts. But this didn't happen; the only significant change is the lower average cut in departmental spending, to be balanced with welfare savings. Spending totals have barely changed, as Capital Economics pointed out. The pound ticked up after the speech and gilts barely moved.

The overall economic outlook remains murky, however. With a possible gilts strike averted by tough action, the hope now is that the private sector can fill the gap left by the squeeze on the public sector. It has certainly made an encouraging start, said Allister Heath in City AM. In the June-August period, private-sector jobs were 361,000 higher than in winter offsetting 46,000 public-sector job cuts.