Time for a haircut? The Chancellor’s Budget spending options

10 March 2016
George Osborne has warned that weaker than expected economic growth means that he 'may need to undertake further reductions' in next week’s budget. Oliver Ilott looks at the Chancellor’s options.

More austerity seems inevitable – but the Chancellor faces a tough task to find sensible ways to cut spending in next week’s budget. The first challenge in making further cuts is that he has pledged to protect a number of areas of spending. Manifesto commitments ruled out cuts to health, schools, overseas aid or pensioner benefits, while concessions to Conservative backbenchers have ruled out cuts to defence or in-work benefits. In November’s Spending Review, the Chancellor went further and ruled out cuts to the security services and policing. The result is that a large chunk of spending now lies beyond the reach of the Chancellor’s knife.

The second challenge for George Osborne is that departments are already struggling to implement his existing plans: in the first six months of 2015/16, 10 out of 16 government departments were already spending more than implied by their annual plans. The biggest overspend is at the Department of Health (an extra ÂŁ885m).

Many of the unprotected departments where the Chancellor will look for reductions are already struggling to keep pace with existing spending plans. The MoJ, tasked with cutting its spending by 12%, has reached the halfway point of the year having achieved only a 3.1% cut.

The third challenge for the Chancellor is making cuts in a way that does not put essential public services at risk. A doubling in the number of assaults on staff in prisons in England and Wales since 2013 suggests that some of the MoJ’s services are already under severe stress:

Assaults on prison staff chart

Faced with these three challenges, it seems most likely that the Chancellor will once again ‘salami-slice’ unprotected budgets, as he did in 2012 and 2013. There is certainly nothing to suggest the Government has done its pre-budget homework. For example, the Single Departmental Plans – intended to serve as a ‘single, clear roadmap for departments’, according to Cabinet Office Minister Oliver Letwin – could have logically and strategically informed spending decisions. But they turned out to be a missed opportunity, and read less like plans for running departments and more like a wish list of things ministers think it would be nice to have.

Each unprotected department is likely to be handed a roughly uniform cut, without regard for what this means for the business of that department. It is a tactic that Osborne first employed in the 2012 Autumn Statement, when departments were given a haircut to spending plans for 2013/14 and 2014/15. Then, the Chancellor cut unprotected budgets by between 1.7 and 2.1% (with DFID an outlier because its funding is pegged to GDP, which was smaller than expected):

Budget something chart

The Chancellor may be able to retrieve some planned cuts that were shelved in November following the OBR’s revision of revenue forecasts. But it is telling that the 2015 Spending Review does not even come into effect until April and already the Chancellor is being forced to alter his plans. This raises questions about the Government’s long-term fiscal planning. With increasing demand for many services and signs that existing cuts are beginning to bite, there is a risk that austerity in the current parliament becomes a case of annual haircuts.

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