Smoke and mirrors with flood defence spending

One of the first figures the insurance industry will look for when the Chancellor, George Osborne, unveils his latest spending review today will be the amount of money committed to building new flood defences. Expect alot of smoke and mirrors.

Governments of all political hues have long since mastered the art of dressing up cuts as increases, often by using the simple trick of announcing the same 'new' money several times over. I fully expect some of that today when it comes to flood defence spending as the government and the insurance industry are playing out the final phase of their elaborate, long-running negotiations on the future provision of insurance for households in areas at high risk of flooding. The government has already shown a willingness to raise the stakes in this debate.

The key figures
With all the figures announced today by the Department for Environment, Food and Rural Affairs (DEFRA) it is important to remember that they will be for England only as the devolved governments of Scotland, Wales and Northern Ireland are responsible for their own spending plans when it comes to flood defences.

There has been a fairly wide consensus since the middle of the last decade that spending on flood defences in England needs to rise to over £1bn a year by 2035 (at 2005 prices). The last government made a start towards this target by lifting spending from around £450m in 2005 to £629m a year by 2010-11. In its first spending review the Coalition government slashed this expenditure by almost 20%, giving the insurance industry more that ample justification for signalling the end of the Statement of Principles guaranteeing the availability of affordable flood insurance to households in flood prone areas.

The Treasury and DEFRA realised at the end of last year that this lower level of spending – projected to get lower still (see graph above) – was not sustainable and threw an additional £120m into the pot, lifting the planned spending for 2014-15 to £570m. This is the figure to look out for in today's announcements. There will be some talk of the total being boosted by local partnerships between councils and the private sector but these have fallen well short of expectations as a recent House of Commons briefing paper explained (Flood Defence Spending in England). With local authorities expected to suffer some of the most savage cuts in this spending review the idea that much money will come from this source seems pie-in-the-sky.

The Treasury and DEFRA will do everything they can to put the most favourable gloss on the figures. They still have some work to do with the insurance industry, constituency MPs and the public ahead of the expected announcement that the Flood Re scheme proposed by the Association of British Insurers will be put in place when the Statement of Principles finally expires at the end of next month. One of the key elements of this will very likely be a per policy levy of over £10 and in order to sell this the government will want to use the argument that everyone has to contribute something, pointing to its own commitment on flood defence spending.

Whether this will wash remains to be seen but watch out for the smoke and mirrors first.