09 November 2015

George Osborne today announced that four departments – the Department for Transport (DfT), the Department for Environment, Food and Rural Affairs, the Department for Communities and Local Government (DCLG), and the Treasury – will have their resource spending cut by 30% up to 2020. Daniel Thornton looks at what that means in practice.

All of the departments affected by today’s announcement experienced significant cuts over the last five years, and the news of these settlements makes clear that we are in the middle of an unprecedented decade of austerity.

Up and down the country, local government will have been interested to hear that DCLG has taken a 30% cut, and might have assumed that this means that the biggest part of its spending – which funds local government – faces the same cut. But it seems the Chancellor, despite implying the department’s whole budget was affected, was actually only referring to the “Communities” part of DCLG – less than 1/6th of the total.

So if the purpose of today’s announcement is to show that the Spending Review is on track, it will have achieved little. These small departmental settlements, which don’t cover most of their spending, actually show the hard work remains to be done.

While the Treasury is the most powerful department, running it doesn’t cost a great deal, and it’s no surprise that the Chancellor has managed to get reductions agreed in his own department.

As for DfT, much of its spending is capital, which is not covered by today’s announcement. A significant part of its resource spending is transferred to local government (£2.1bn), including local transport services like buses and community transport. So we can expect to see reductions to these local services on 25 November, possibly leading to service cuts or fare increases.

Today’s announcement on DCLG only covers the £2.4bn of resource that the department spends centrally, and much of this is on housing subsidies. This spending is being reduced as new obligations are placed on local authorities and registered social landlords, which will only increase the pressure on the social or affordable housing sector.

Meanwhile, the Chancellor’s housing subsidy to private first-time buyers –“Help to Buy ISAs”– are forecast to cost £835m in 2019-20.  It is not clear whether this scheme has emerged unscathed. And another DCLG programme on troubled families looks unlikely to be cut given the prominence it has received in the Prime Minister’s speeches.

It looks like we will have to wait until the Spending Review announcement for the local government settlement. But big changes are underway in local government finance, as the Chancellor has announced that from 2020 local government will keep all of the business rates, instead of only half as at present. While this provides incentives to local authorities to support business growth to increase their local tax base, some areas – such as big cities – have more and bigger businesses and more potential for growth.

The government will first need to consult on the design of a new redistribution mechanism, including controversial issues such as the balance between districts (which get most of the business rates at the moment) and counties. Then it will have to get legislation on this difficult issue through Parliament with a small majority in the Commons and none in the Lords.

As for Defra, it has yet again settled early. New Secretary of State Caroline Spelman did the same in 2010, and Liz Truss follows in her footsteps this year (after offering most in the summer budget in-year reductions exercise).

One big Defra budget was not covered today – capital spending on flood protection – though it is significantly lower in 2015-16 than it was in 2010-11. Other budgets have already had big chunks taken out of them, and will go down further. While the UK remains in the EU, farm subsidies continue courtesy of the Common Agricultural Policy. Cuts will have to fall on discretionary spending promoting food and farming, the environment, protecting against animal and plant disease, and finally the operating costs of the department and its agencies.

Much of Defra’s budget is spent by its big arm’s length bodies – the Environment Agency and Natural England. A merger of EA and NE (and the Forestry Commission) was ruled out in the Triennial Review in 2013, though a similar merger went ahead to create Natural Resources Wales. As the department looks to shrink further, the most cost-effective future operating model will be back on the agenda. But the Secretary of State will need to avoid her predecessor’s problem of mishandling Defra’s stakeholders – which forced the abandonment of forest sales in early 2011.

The real risk in shrinking Defra too far is another badly handled and costly crisis. The Treasury had to stump up extra money for flood defences in 2014-15 after the winter flooding made headline news – but that is relatively cheap compared to an animal health crisis (the NAO estimated foot and mouth crisis cost the public sector £3bn and the private sector £5bn in 2001).

This week, the IfG will look at the challenges posed by the Spending Review and outline six ways Ministers and departments need to manage the cuts. Our report, Managing with less: the 2015 Spending Review, will be released on Friday 13 November.

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