Spending cuts have turned out to smaller than George Osborne signalled. Daniel Thornton and Oliver Ilott explore the implications for Whitehall.
When the Spending Review was launched in July, the Chancellor said that while some areas of spending would be protected, other areas would need to “find significant savings". His fiscal calculations required cuts of between 25% and 40% – the same levels modelled in the 2010 Spending Review – leading many to assume that the next five years would see a repeat of cuts under the Coalition.
The Chancellor was also at pains to stress how severe cuts would be, with announcements of 30% cuts for some departments, and 21% cuts for others. And he sprinkled his Autumn Statement with cuts – ranging from 37% for Transport, to 15% for Defra.
But four months is a long time in politics, and since July we’ve seen the tax credit defeat in the Lords and the attacks in Paris.
It also became clear yesterday that the Office of Budget Responsibility had revised some of its revenue forecasts, and the Chancellor had decided to raise some taxes. Both of these factors gave him more room to manoeuvre, which he used to reduce the severity of spending reductions.
As the dust settles, how does the Spending Review look for the public sector?
The first point is that the percentage cuts only cover part of departments' spending. They apply to the day to day spending by departments which they can control (known as RDEL), as opposed to capital (for building things) and annually managed expenditure (mainly welfare). Capital was increased, for example, with Transport almost doubling from £6.1bn in 2015-16 to £11.4bn in 2019-20.
The second point is that although some departments are facing significant cuts to RDEL by the end of the Parliament, others are seeing significant increases. In the short term, most departments are not facing cuts, but increases.
The third point relates to the running costs of departments (administration), which forms part of the day to day spending. While overall administration costs will fall, from £9.9bn in 2015-16 to £8.7bn in 2019-20, in the short term the reductions are small overall, and several departments will see increases in their administration spending next year.
Some of these increases in administration budgets may represent the upfront costs of making longer-term savings, such as redundancy costs for civil servants, or spending on digital service redesign to reduce running costs. It seems this is the case with UK Trade International, where Francis Maude has brought his vision of digital transformation (we will return to the digital implications in the coming weeks).
Of course, it may also be that some are focussed on avoiding short-term pain, given the prospect of ministerial changes after the EU referendum.
However, while the cuts are less severe than expected, and departments have longer to plan for them than they may have thought, the Chancellor has added new tasks to the civil service’s dwindling numbers – procuring lots of defence equipment, managing the new Apprentice Levy, ensuring job-seekers visit Jobcentres once a week, and working out which properties are second homes and buy-to-let so that they can pay higher stamp duty.
Local government will see dramatic changes with a shift to full retention of business rates, greater scope to raise council tax and to spend the proceeds of asset sales, and cuts in central government funding, including for public health and local transport.
The challenges we identified in Managing with Less remain: prioritising, managing contracting out and decentralisation, digital transformation, reforming arm’s length bodies, and maintaining capabilities in the civil service. We will return to these as the implications of the Spending Review become clearer.
