The Government needs to spell out its spending priorities

The Government set out in the 2015 Spending Review detailed spending plans for each department and for local government grants for this year and next. However – apart from announcing a £20 billion birthday present for the NHS – the Chancellor has not yet said how much he will spend on other public services in 2020/21 or beyond. On current estimates public services are facing cuts of nearly 4% to pay for the promised NHS spending. This will be the subject of next year’s spending review.

How much the Government spends depends in part on how much it borrows. At present public sector borrowing is at 1.8% of national income. The Office for Budget Responsibility (OBR) estimates that it will fall to 0.9% by 2022/23. Thereafter, Chancellor Philip Hammond has a target to eliminate borrowing by the “mid-2020s” but has not said how this will be achieved.

If the OBR’s latest forecast is correct, day-to-day spending by government departments on public services would need to fall by 0.6% in real terms between 2019/20 and 2022/23 to balance the books. That equates to a £5bn cut to annual departmental spending by 2022/23, but is less severe than the 0.9% a year cuts imposed in the ten years to 2020.

On top of this £5bn cut, Hammond also needs to find an extra £16bn to meet May’s promises to the NHS in 2022/23. (This rises to £20bn in 2023/24.)

Over the same period, the OBR forecasts that local authority spending funded by locally-raised council tax and business rates will grow by 1.7% in real terms (or an increase of around £800m a year by 2022-23). Exactly how quickly this element of spending grows will depend on how quickly council tax rates are allowed to increase and how fast revenues from business rates rise.

Extra money could be made available for public services by loosening borrowing targets…

Two of the Government’s current fiscal targets expire in 2020/21. The Chancellor is committed to ensuring that public sector net debt falls as a share of national income between 2019/20 and 2020/21. But he currently has no target for debt after that. He is also committed to ensuring that the Government borrows no more than 2% of national income in 2020/21, but thereafter he set only the rather vague “mid-2020s” objective.

If the Government was content to leave borrowing at 1.8% of national income instead of trying to make progress towards eliminating it, public service spending could be increased by around £20bn a year by 2022/23. This would provide enough money to fund the NHS’ birthday present and avoid the need for real terms cuts to spending across other departments.

But such spending would mean debt rising as a share of national income in 2022/23. If the Government wants to avoid that, without making any other changes to tax and spending plans, it would have only an extra £8-9bn for spending in 2022/23. That would mean a 3.9% real terms cut to non-NHS departmental spending.

…or raising taxes…

Last month, the PM announced that the extra money promised to the NHS over the next five years would in part be funded by raising taxes. It has been reported that she is even considering abandoning some of the explicit pledges made in last year’s Conservative election manifesto not to raise certain taxes. But no details have yet been given about which taxes would be raised or by how much.

There are many options. A one percentage point increase in all rates of National Insurance, for example, would raise about half the money needed for the NHS. Abandoning plans to cut corporation tax from 19% to 17% in April 2020 would raise about £5bn a year.

But could May garner enough support from her own MPs to push new tax rises through parliament in the Autumn Budget? By separating the firm announcement of the NHS spending goodies from any serious discussion of where the money will come from, the Prime Minister has made the job of persuading the public that corresponding tax rises will be needed much more difficult.

…or cutting welfare spending

In each of the past two major spending reviews, extra money has been made available for public services by cutting spending on pensions or welfare.

In 2010, cuts were made to Employment and Support Allowance, child benefit was taken away from higher income parents (ending the long-standing principle of universality), and contribution rates were increased for members of public service pension schemes, helping free up over £10bn a year of extra spending for public services.

In 2015, as promised in the Conservative party manifesto that year, £12bn a year was cut from welfare spending by a number of measures. These included freezing the rate of most working age benefits for four years, limiting eligibility for state support to the first two children in a family, and reducing the amount someone could earn before losing their benefits.

The Government could try to follow similar strategies this time – means-testing previously universal benefits (such as winter fuel payments for pensioners), further limiting eligibility for certain benefits, or continuing to hold down growth in benefit amounts.

But it will be harder to find further savings. Some of the cuts announced in 2015 have already been reversed following a public outcry – including changes to Personal Independence Payments for disabled people and planned cuts to tax credits. The 2015 welfare cuts ultimately led to the resignation of Iain Duncan Smith, then-Secretary of State for Work and Pensions, who objected to the cutting of benefits.

With ministers already jostling to make the case that more money should be spent on their area, the Government has yet to answer some important questions. How quickly does it want to cut borrowing? Which taxes is it willing to raise and by how much? Does it think further savings are possible on pensions and welfare spending? Answers to those questions are needed to help departments and service providers work out what sort of service they will be able to provide within the sort of budgets that will be available.