12/12/2014 14:33 GMT | Updated 12/12/2014 14:59 GMT

Is George Osborne Really Cutting Britain Back To The 1930s?

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Britain's Chancellor of the Exchequer George Osborne attends the official launch of the City Football Academy in Manchester, Northern England, on December 8, 2014. AFP PHOTO / OLI SCARFFRESTRICTED TO EDITORIAL USE. No use with unauthorized audio, video, data, fixture lists, club/league logos or live services. Online in-match use limited to 45 images, no video emulation. No use in betting, games or single club/league/player publications. (Photo credit should read OLI SCARFF/AFP/Getty Image

George Osborne's "extreme" cuts after the next election could mark a return to "1930s Britain", or so Ed Balls suggested on Thursday morning.

Speaking to Radio 4's Today Programme, the shadow chancellor said: "We’re not going to go back to the 1930s and have spending at 35% of GDP. I don’t want to have our children grow up in a society where people sit behind fences because there are not any police, or where children born into poverty stay in poverty, or where our National Health Service becomes Americanised."

However, the Tories insist that their cuts would only see spending fall to the same level as it was back in 2002/2003, when Balls was in the Treasury.

Should we be worried or not? Who's right? HuffPostUK takes you through what you need to know about...

Where are Labour and Ed Balls getting this "1930s Britain" warning from?

The Office for Budget Responsibility (OBR) said in its analysis of Osborne's Autumn Statement that planned cuts after 2015 which would see the total level of public spending fall to 35.2% of GDP in 2019-2020, "taking it below the previous post-war lows reached in 1957-58 and 1999-00 to what would probably be its lowest level in 80 years".

But why are the Tories just saying spending would just be cut back to 2002?

It's the OBR again, which also forecast that "by 2019-20 day-to-day spending on public services would be at its lowest level since 2002-03 in real terms (based on whole economy inflation)".

A Labour spokesman declined to develop their argument beyond pointing out that the OBR's same forecast about day-to-day spending goes on to say that it "would be at its lowest level since 2002-03 in real terms (based on whole economy inflation), since 2001-02 in real terms per capita and since the late-1930s as a share of GDP".

So how worried should we be about this "1930s" level of spending?

The plans wouldn’t mean returning to 1930s standards of public services, just the amount of spending in comparison to the size of the economy (% GDP), a measure that economists like as it better accounts for population change and wage increases.

The figure can end up plummeting so far as the economy continues to grow and Osborne succeeds at continuing to shave more off public spending, as he openly promises to do.

James Meadway, from the New Economics Foundation, says the %GDP measure is "sensible" as "it tells you, relative to the whole economy, roughly what part of it is occupied by government." He adds: "We have all grown up in a world in which the government occupies, consistently, around 40% of GDP. That was the average, for three decades, before the crash."

Others aren't so phased by the prospect of cutting the state down to 35% of GDP. 'We're not going to return to the age of the soup kitchens," David Kern, chief economist at the British Chambers of Commerce tells the Huffington Post UK. "Measuring it as a percentage of GDP is a way to make the pain appear less awesome."

Why are the Tories referring to "day-to-day spending", is that actually comparable?

Day-to-day spending at Whitehall departments is not the same as total spending, as the Tories' preferred measure overlooks levels of government investment on infrastructure (capital spending), and welfare spending (which is classed as annual managed expenditure (AME)).

As Capital Economics' Samuel Tombs tells HuffPostUK: "One should probably go a step further and take account for the growth in the population and the ageing of the population, which means that public services are now in more demand. This would show the cuts in a worse light than the Conservatives’ suggest."

A Tory spokesman suggests that welfare cuts would actually show an even smaller drop, telling HuffPostUK: "Welfare savings would actually reduce the cut in government departmental spending to a level more like 2004 or 2005."

But Oxford economics professor Simon Wren-Lewis explained on his blog how Osborne's cuts mean much more than just reversing years of Labour increased spending.

Pointing to the OBR's analysis, Wren-Lewis explains that poverty will increase over the next five years due to benefit cuts, and the greater number of old people will increase the burden on the welfare bill.

"Housing benefit is 0.3% higher as a share of GDP (partly reflecting depressed real earnings), but the main reason is the state pension, which is almost 1% higher as a share of GDP. This represents both an increased ‘caseload’ (more pensioners) and a more generous value of pensions themselves.

"Although the numbers suggest that here too Osborne plans to pay for this additional spending by cutting the size of government, he has indicated that he hopes to reduce this increase in welfare payments by some, as yet undeclared, means.

"So this is why the reduction in the size of the state planned for 2018/9 is much more than reversing Labour’s increase".

So if everything is just back to Tony Blair spending levels, that's good right?

The departments Osborne is sparing from the axe - health, education and international aid - will do alright, but that can't be said for every other part of government, which could suffer lower spending levels than seen in 2002.

TUC Chief Economist Geoff Tily explains: “There is something missing in what the Conservatives say, which means they have glossed over the fact that day-to-day spending for most services will be lower in real terms than in 2002.

"A few services would have protections that allow spending to go up in real terms – for example the NHS. That means that every other service gets less in real terms than in 2002, because they get a smaller share of the pot.

"So it is highly misleading for them to imply that their spending on our public services in 2020 would match Tony Blair’s spending in 2002 in real terms."

How painful would a return to early 2000s level of day-to-day spending be anyway?

Independent policy expert Declan Gaffney scoffs at Labour for trying to use the % GDP measure to suggest it is an equivalent cut in real terms to 1930s levels.

"I don't know why Labour focussed on total spending," he said. "It's the forecast spending on public services, excluding benefits, pensions, debt interest, that look completely implausible, especially once you take account of protected spending on NHS & education."

Despite Labour's warnings about a return to the 1930s, a return to early 2000s spending levels will still not be painless.

The fall in Whitehall departments' spending needed would be by over a quarter (26.7%) by 2018-2019 in real terms, or 31.3% in real terms per head, according to the OBR.

As a share of GDP, it represents a decline of 40.3% - not something to sniff at. Spending on departments that Osborne hasn't ring-fenced, like prisons and the army, would be on track to fall by as much as 55% in the decade to 2018-19.

The Office for National Statistics' records don't go back far enough to find a time when day-to-day spending was below 12.6% of GDP.

With the Tories standing firm on protecting spending for the NHS, schools and international aid, the OBR forecasts the rest of government spending more than halving in per head terms over the whole austerity period, from £3,020 in 2009-10, to £1,290 by 2018-19. In GDP terms, that's a drop of 11.3% of GDP, to 4.3% of GDP.

Supporters may depict it as reversing many years of spending increases under Labour, but the numbers show that making such a return would need very substantial cuts.

James Meadway, economist at the New Economics Foundation: warns: "The implication is that every part of government outside of the protected areas will be cut in a way that I don't believe has happened outside of the ends of major wars.

"Cutting spending per head, outside of the protected areas, by more than half means making serious inroads into what we think a government does."

The TUC's Geoff Tily issues a stark verdict on what this means. "There are cuts to welfare on an unprecedented scale which will put massive additional pressures on health and social services. Far from ‘winning the global race’ as the Tories like to claim, they would send Britain backwards, shrink the state and leave us in a state of decay.”

So how painful are Osborne's cuts?

It may be overblown to warn of 1930s style Britain with services akin to that of the Great Depression, but the scale of the cuts needed is still considerable.

As Paul Johnson, head of the Institute for Fiscal Studies told HuffPostUK earlier this month: "There is no getting away from the fact that what is to come is really big cuts going forward."

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