2015 Spending Review: what the Chancellor should be looking to do tomorrow

24 November 2015

There is an air of déjà vu in Westminster this month. Apocalyptic predictions of the consequences of cuts to government departments, anxious civil servants thrashing out last minute deals with the Treasury and dire warnings from neo-Keynesian economists about the consequences of trying to balance the books. George Osborne’s first Spending Review in October 2010 suddenly feels close at hand again.

In some ways, tomorrow will be very similar. The Chancellor will once again confirm the ambition he set out in the summer to achieve an overall budget surplus by 2019/20 – a tougher version of his 2010 plan for a cyclically adjusted current balance (excluding capital spending). International aid, the NHS and the schools budget will all be reaffirmed as ‘ring-fenced’ – this time joined by defence, bolstered by a commitment to meet the NATO spending target. Economies are likely to be again found in the welfare and public sector pay bills. However, this Spending Review will also be fundamentally different in two key respects.

The first is that both the public finances and economy are much stronger than in 2010. Despite the prophecies of doom, GDP is past its pre-recession peak and weekly earnings are growing at 1.9% per year – the first increase since 2008. Despite staff reductions in the public sector, total employment has increased by some 1.75 million. In spite of all the negative press, the UK’s post-crisis performance has followed both historic and international precedent: economies which cut their deficits quickly and emphasise spending cuts over tax rises tend to recover faster. In contrast, 2010 saw UK net borrowing at a higher level than any time since 1948 at over 10 per cent of GDP. Public spending had increased faster as a share of national income than any comparable economy since 1997. In 2015, while the deficit is still high, with just over half the reduction already done it is no longer so daunting.

The second difference is the very fact that deficit reduction has already been ongoing for five years – and has hit some areas much harder than others due to various targets, protections and ringfences (often applied to areas which enjoyed very healthy increases in the 2000s). The Departments of Work and Pensions, Environment, Food and Rural Affairs, Ministry of Justice and Transport are all projected to have had their budgets cut by more than a third by the end of 2015. Unlike 2010 – when some departments were able to survive by ‘salami slicing’ economies, further spending reductions in a now even smaller pool of non-ringfenced departments will mean stark choices. Bold innovation in digital governance, cross-departmental working, devolution and our approach to measuring and understanding the levers of public sector productivity – as we at Reform explored recently – may well now be unavoidable – and no bad thing. There will also be the opportunity to apply the same rigour to the ringfenced Departments – especially the NHS.

The Chancellor’s record over the last five years has been formidable – faster growth than comparable economies, a robust jobs market and relatively consistent public satisfaction with public services. There are some problems – in particular, the effects of ringfencing so many budgets, a tendency to undervalue capital investment, and fiscal rules that fail to account for long-term debt dynamics or provide guidance for the next downturn. Not every saving has been sustainable – or fair. However, his approach remains largely viable to balance the books, return the fiscal balance roughly to robust state that prevailed at the end of the 1990s and begin (slowly) to reduce the national debt. It has been a long road since 2010 – and sometimes a bumpy one. But it remains the only viable course.

Ed Holmes, Senior Researcher, Reform

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