Spending Review 2015 – ring-fencing, not convincing?

27 July 2015

The idea of 40 per cent cuts in the unprotected budgets continued to interest commentators over the weekend. David Smith of the Sunday Times (£) argued that George Osborne’s bark is worse than his bite. The actual real terms cut for the unprotected departments will be a bit more than 10 per cent in real terms, using IFS figures. He pointed out that total public spending will increase by 3 per cent by 2020-21 (although that represents a fall from around 40 per cent of GDP this year to around 36 per cent).

Why set out the 40 per cent number at all then? To concentrate minds in the spending departments, as Philip Hammond said last week. To make departments consider ideas that they would not do otherwise, argued Matthew Hancock. That last motive is a particularly good one, but it is undermined if the spending departments don’t believe that the 40 per cent number has any real meaning. Thought experiments are all very well but they will go no further than the Whitehall shelf, gathering dust.

In fact public spending will only fall in the long term if services become more productive. If services just get worse, the public will demand higher spending. That is what happened in the mid-to-late 1990s, paving the way for the boom in public spending in the Blair years.

Here the Spending Review framework was not fully convincing. By far the most important thing about the Spending Review 2015 is the ring-fencing of over half of public spending – pensions, pensioner benefits, health, schools (albeit protected only in cash terms), defence and overseas aid. Speaking to the Treasury Select Committee last week, George Osborne said that the ring-fences reflected the Government’s “political priorities”, and no doubt they do. It is hardly going to promote public sector productivity, however, if the Government’s “priority” is to spend more money where it can.

The framework goes on to identify themes for reform: devolution, innovation, integration between services, digital technology, better financial management and better use of land. These are good themes as some wrote last week. In retrospect, they may be drowned out by the headline spending increases in the big areas.

In their introduction to the framework, George Osborne and Greg Hands write that they are confident about further spending cuts “because we have done it before”. At one level that is right. The 2010 Parliament did show that public services can improve or maintain quality while budgets are cut. It also showed, however, that barely anything happened to promote productivity in the ring-fenced departments. Health and schools are only starting on their productivity challenge now. A co-ordinated drive to better use of technology or land did not happen. Ministers have to be careful of simply offering more of the same.

Andrew Haldenby, Director, Reform

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