29 December 2015

Chancellor George Osborne presented his third Spending Review last month, setting out what will happen to public spending for the next four years. Julian McCrae looks at five things that happened, and what this means for the Government's ability to deliver on its promises.

1. On the big picture, the Chancellor pulled back from the scale of cuts outlined in the July budget

The headlines immediately following the speech announced the end of austerity. This is not all that surprising, given the immediate press reaction is heavily dependent on the Treasury's presentation, and the Chancellor was unrelentingly upbeat in his speech. But as the Office for Budget Responsibility (OBR) made clear later, the Chancellor was lucky rather than prudent – effectively spending an unexpected forecasting windfall. And the detailed numbers still reveal substantial reductions in many areas. The slides below set out what actually happened. As expected, it is a story of contrasting fortunes. In real terms, five departments – DfID, DH, MoD, CO and DfT – will gain by around £10bn in total, while the other departments will lose just over £20bn of resources between them.

2. The Treasury has still not released numbers setting out the actual settlements it reached with departments

The departmental percentages announced by the Chancellor in his speech did not show how future spending will change compared to what departments will spend in 2015/16. Instead they were comparisons to the Treasury’s own Spending Review ‘baseline’, a figure that Treasury did not (and never plans to) reconcile with other public spending figures. As such, while the Treasury numbers were dutifully reproduced by many organisations the following day, they can be seriously misleading. For example, DECC's day-to-day spending falls by around 40% between 2015/16 and 2019/20, rather than the 16% figure trumpeted by the Chancellor. Defence day-to-day spending sees a (small) real-terms reduction, rather than the real increase stated in the Spending Review documentation. Even more unhelpfully, most of the domestic spending wrapped into the international aid ringfence (for example, the £1.5bn Global Challenges Fund for UK science spending) appears to be included in the DfID departmental expenditure limits (DELs), even though the money will be spent by other departments (e.g. BIS, for the Global Challenges Fund).

3. The scale of the state changed, but in some surprising ways

The media coverage rightly picked up the Chancellor's reliance on tax increases. The apprenticeship levy now funds skills policy, while council tax increases are expected to cushion reductions in social care and police funding. Tax increases following the election were to be expected. In other areas, the effect of cuts are likely to turn up in higher charges. So, for instance, it seems that the cuts to DfT’s day-to-day spending fall heavily on Transport for London, and may well end up in higher fares. Finally, despite the Prime Minister’s talk of bringing in new providers in flagship areas, the opposite seems to be happening. The Chancellor announced the introduction of a “new Work and Health Programme after current Work Programme and Work Choice contracts end” – he did not announce that this new programme has only 10 to 15% of the funding of the contracts it replaces. It looks like this is ‘renationalisation’ of active labour market polices, or a dropping of them altogether, or both. It is not clear whether ministers have actually made up their minds.

4. The effect of the cuts on frontline services looks more manageable, but the Chancellor may still have to find more money in years to come

As ever, in the run up to the Spending Review, the advocates of different public services were making dire predictions about what would happen if they are cut again. A month on, it is interesting to see what people are saying. Local government saw a lot of changes, but a combination of possible council tax rises and fiscal autonomy makes the situation better than expected: it is now possible to find council chiefs who think they can (just) make it through the next few years. On the NHS, the Government trumpeted the frontloading of funding as a means of investing in reform. For many, such as The King’s Fund, it was really a necessary cash injection to keep the show on the road. There is every possibility that more money will be needed later in the parliament (and closer to the next election). With the politics of the Spending Review showing that areas like defence and policing are off the table for future cuts, and the Chancellor being forced to breach his own welfare cap, the potential for future cuts to fund any extra spending looks smaller than ever.

5. The Chancellor needs to achieve a lot through efficiencies, but it’s not clear Whitehall yet has the ability to deliver

The word “efficiency” appeared over 50 times in the Spending Review document. There were some announcements that suggest the Government is determined to ensure Whitehall is capable of delivering such efficiencies, such as the creation of a new Costing Unit in the Treasury. And we should know more after the promised publication of the Single Departmental Plans in January. Once we have this detail, we’ll be publishing an update on the Government’s response to the questions raised in our recent Managing With Less publication.

Since 1997, Budget speeches and other fiscal documentation have steadily become less reliable. This Spending Review was no exception, and some of the examples above could easily be described as (intentionally) misleading. It might be useful if Parliament set some bounds on what is acceptable when ministers are informing the House of Commons (and the country) about changes to fiscal policy.

Further information

Abbreviations for government departments can be found here.


A really interesting piece on the underlying detail of the spending review announcement. Interesting times ahead.