Just how bad is ‘flat cash’ for the research councils?

OK. We already know there are lots of reasons for regarding this years science budget as a cut. Capital for example. But as of Tuesday, there’s a compelling reason for viewing even the best bit of the announcement, the flat cash settlement for current spending, as significantly worse than we thought.

That cash settlement will be eaten away by inflation. So in real terms it is a cut. How big a cut? That depends on how high inflation turns out.

At the time of the Budget, the Treasurys forecasts of inflation accumulated over the four years of the spending review period to 10.9 per cent. So on that basis, flat cash equals a real terms cut of 10.9 per cent.

But there have always been at least five good reasons to suspect the Treasurys inflation forecasts were too low. Inflation makes the huge national debt easier to pay off. It is often needed to get the economy growing. The Treasury would not want to spook the markets by admitting inflation is out of control and will take years to get back to the 2 per cent Bank of England target. Higher inflation makes cutting departmental budgets easier. And most other forecasters have predicted higher figures.

Now the previously dubious Treasury figures have become ludicrous. The growth figures announced on Tuesday morning showed a 0.5 per cent fall in output in the last three months of 2010. Hence there is no prospect of the interest rate rises required to get inflation under control – cheap lending to get the economy going is more important. The markets have been spooked, leading to a sharp fall in the value of sterling, and the governor of the Bank of England has decided sensibly to get all the bad news out of the way in one go. Mervyn King said later in the day that inflation is likely to hit 4-5 per cent within months.

All this means that anybody planning for the future needs to base their work on higher rates of inflation. How much higher? Ive yet to find anyone who has issued new forecasts since Tuesday. But the CBI figures were already significantly higher (ie more believable) than the Treasurys. Using those instead, flat cash equates to a cut of 13.2 per cent. And thats before the CBI has had a chance to take account of the deterioration in the economy signalled by the growth figures.

Factor in the new expectation of even higher inflation, and flat cash could easily look like a cut of 15 per cent in real terms when the new CBI figures come out.

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Note

Treasury and CBI inflation figures 2010-11 to 2013-14