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How the 2015 Spending Review will differ from 2010

The Institute for Government and the Institute for Fiscal Studies examine the challenges for the 2015 Spending Review.

Today the Institute for Government and the Institute for Fiscal Studies will examine the challenges for the new Government as it embarks on the 2015 Spending Review. Ahead of the event, held at the Institute, Researcher Oliver Illot looks at how the 2015 Spending Review will differ from the process in 2010. He considers how Government should design plans that are politically sustainable, engage with the process of devolution and are deliverable by Whitehall departments that must retain the necessary skills and people.

The Coalition Government set out to close the deficit within a single Parliament. We should not be surprised that this target has not been achieved. Canada, whose fiscal consolidation is frequently cited as an exemplar for the UK, took 15 years and 3 electoral cycles to close their budget deficit in the 1980s and 1990s. The primary reason that the UK did not close the deficit over the last Parliament has been the slow recovery of Government revenues. By contrast, the Government has been broadly successful in meeting the plans for departmental cuts set out in the 2010 Spending Review, in some cases exceeding targets. In the graph below, 2013-2014 Departmental Expenditure Limits have fallen broadly in line with the plans made in the 2010 Spending Review. However, there are signs that this adherence to Spending Review plans is coming under pressure.

Figure 1: 2013-2014 DEL outturn against Spending Review 2010 plan

Source: PESA 2013/14 and Spending Review 2010

Cuts have been achieved without the perception of large scale damage to frontline services. In 2013, the BBC conducted polling on the public’s attitude towards the changing quality of their public services. While there was some variation, in a number of areas people felt that the quality of their public services had actually improved in recent years.

Figure 2: Do you think each service has got better or worse in the last five years, or has it stayed the same? Is that much or a little better/worse? (BBC/ICM, net positive responses)

Source: ICM

The Government regularly cites these successes as the reason it is confident that it can finally eliminate the deficit through further spending reductions in this parliament. But the conditions in 2015 are different. Unlike in 2010, public services are already under pressure. To take one high profile example, there has been a significant increase in the pressure on A&E departments. Hospitals aim to limit waiting times to four hours per patient in 95% of cases – last winter that target was comprehensively missed.

Figure 3: A&E: frequency with which 4 hour waiting time is met

Source: NHS England

The challenge for 2015 is therefore to come up with new plans that both eliminate the deficit by 2018/19 and protect service quality by generating efficiencies. Crucially, these changes need to be politically sustainable in the sense that, while the public might not like them, they will ultimately accept them. The IFS analysis shows the scale of the spending reductions that are necessary to eliminate the deficit. Over the next few months, Whitehall will be arguing about where those cuts will ultimately fall. This will be a fundamentally political exercise, some of which has already been completed – during the election campaign NHS England was guaranteed £8bn more in spending, meaning the cuts falling elsewhere will have to be higher. But the Spending Review is not simply a political exercise. It is a planning exercise that needs to figure out where the efficiencies will come from that can protect service quality. Looking again at NHS England, its own models show that pressures such as an ageing population and the cost of new treatment will raise its costs to around £137bn by 2020/21. Even after the £8bn guaranteed in the election, the government is only forecast to provide £116bn in funding. The gap must come from efficiencies – either through raising productivity (doing more with less) or reducing the pressures (such as through increased public health).

Figure 4: NHS England forecast cost pressures and productivity gains

Source: NHS England

Many of these efficiencies require services on the ground to work together in different ways – for example the NHS and social care providers. A key mechanism for realising these changes is decentralisation, which allows join ups in local service provision. Here the conditions are more amenable than in 2010, with the Treasury taking a clear lead and overcoming potential barriers. But plans to create efficiencies and boost productivity cannot be implemented without a Whitehall that is capable of delivering them. Departments faced sharp cuts in the last parliament, and will almost certainly face further cuts this time around. These must ensure that Whitehall has the skills and people to implement the Spending Review.

Figure 5: headcount at Whitehall departments, change since 2010

Source: Institute for Government analysis

All of these plans need to be politically sustainable. In 2010, the government won the argument about the necessity of the cuts. And this support has remained – pollsters have consistently found that the public view cuts as necessary by a margin of two-to-one. However, in 2010, the Government rapidly lost the argument on the fairness of cuts. A series of mismanaged announcements such as the cancellation of the Building Schools for the Future programme and proposed privatisation of the forests led to an entrenched perception that the cuts were not fair, as shown in the graph below. In the context of increasing pressure on public services, Government plans need to be politically sustainable. These are the things that we will be watching for over the coming months.

Figure 6: Thinking about the way the government is cutting spending to reduce the government's deficit; do you think this is being done fairly or unfairly? (YouGov, %)

Source: YouGov

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