£3.5 billion is not an important number
The most high-profile aspect of the review, the £3.5bn savings pencilled in for 2019/20, is actually the least important. In overall public finance terms, this is a tiny adjustment. We will see much larger changes to the public finances as a result of the forecasting adjustments that the Office for Budget Responsibility will announce next week (not to mention the subsequent adjustments that will follow in Autumn 2017, Spring 2018, Autumn 2018 and Spring 2019 before the £3.5bn of savings start).
The logic that led to the £3.5bn number is also redundant. It was only ever there to make George Osborne’s sums add up for 2019/20 (the only year that counted under his fiscal rules). It was the icing on the cake of a particularly blatant set of fiscal con-tricks, designed to delay the inevitable abandonment of Osborne’s rules. When Philip Hammond buried those rules last Autumn, and increased borrowing markedly for this Parliament, the £3.5bn figure became effectively a random number, bereft of purpose, floating about inside the public finances. The Chancellor has effectively already accepted this, promising in the Autumn Statement that to recycle £1bn of the money saved back into the departments that found the savings.
Government risks repeating approach that is running out of steam
The level of savings is not that important, but the way the Government goes about finding them is. Many big chunks of Government spending are already off limits. This week’s announcement repeated the ring-fences that the Government has created: the NHS and schools, international aid and defence are all off the table. And the Chancellor repeated at Treasury Questions that the Government has no plans for further welfare reforms in this Parliament.
So yet again, the search for savings will fall on the same, unprotected, areas of government. This creates a ‘ringfence multiplier’ – while £3.5bn is only about 1% of total day-to-day spend of all departments, it is 4% of the unprotected spending. And as our Performance Tracker shows, the pressures on many unprotected services are severe. For example, having just put more money into the Ministry of Justice’s budget for prisons in the Autumn Statement, simply reinstating some of these cuts through the Efficiency Review would be odd to say the least.
What the Efficiency Review needs to do
Instead of just searching for extra savings, the Efficiency Review actually needs to reboot the Government’s entire approach to efficiency. The 2010 Spending Review proved to be successful, controlling spending while maintaining the scope and quality of services. It did this through setting hard budget constraints that the Treasury stuck to throughout the last Parliament. This forced a lot of fat out of the system, but failed to deliver the more fundamental reforms that might have allowed the next wave of efficiencies to be delivered.
This approach was running out of steam by the time of the 2015 Spending Review. The sense that the Government is now bouncing from spending crisis to crisis – first prisons, then adult social care and next hospitals – is very real. A successful Efficiency Review must help the Government break this pattern.
The Government needs the review to be a serious, data-driven exercise. Instead of repeating aspirations to transform services (governments have talked about things like controlling demand in hospitals and increasing rehabilitation for prisoners for decades), the Review should analyse why such transformations have not occurred in the past, and develop strategies that can succeed this time around. And it must take seriously the emerging signs of pressure, such as recruitment problems in teaching and rising stress levels in the police.
There are undoubtedly many efficiencies to be made from public services – with a spend of over £300bn this is not surprising. But achieving those efficiencies is the challenge. Osborne’s Review, created for entirely different, tactical reasons, gives the Government the opportunity to address the structural challenges of the next few years.