Before the election the chancellor had already set his target for the public finances: to run a surplus. Since then he has decided that running a surplus is a permanent ambition, not a one-off demonstration of discipline. All he needs now is a plan for achieving it. The Spending Review – which was kicked off this week with the results to be announced on 25 November – can provide that plan but only if it lives up to its name.
For the moment the chancellor is nowhere near achieving a surplus – the latest public finance figures released show that he is already £25.1bn adrift in this financial year. Rising tax revenues from a growing economy will help to close the gap. But there have to be cuts in spending too.
The prime minister likes to say that these cuts amount merely to saving £1 in every £100 that the government spends. It sounds easy when you put it like that. Yet the claim is inaccurate. Factoring in spending increases, such as for the NHS and defence, and items of spending that have been ring-fenced or are out of the government’s direct control, such as debt interest payments, the Social Market Foundation calculated earlier this year that the task ahead is more like saving £12 in every £100 that is within the scope of cuts.
Can it be done? Perhaps. The chancellor certainly projects confidence about the task ahead in the document setting up the Spending Review that he published this week. He even announced in-year budget cuts in advance of the Summer Budget. He made it seem that he is moving ahead at pace, although the practical impact of announcing these cuts is that new secretaries of state are spending precious time figuring out how to handle new – and by definition, quick and dirty – cuts for the current financial year, rather than preparing for the difficult Spending Review that covers the rest of this parliament.
The truth is that the additional spending cuts for this year are little more than a sideshow compared to the cuts that are needed ahead. Going ahead on the basis that these will be easy to achieve runs many risks.
The first is that people – primarily voters but also backbenchers and people on the front line of public services who have to deliver the cuts – will be unprepared for the level of change required. The second is that government has learned the hard way – through major projects going wrong – that new spending requires careful planning. The same lesson applies to cuts.
And the third is that cuts made tactically may be unsustainable. If you fail to deal with the underlying demand for the service, then you haven’t reduced the cost, you’ve just postponed it or moved it somewhere else. Reduced spending on skills can turn into a higher need for investment in the future. Reduced spending on social care for the elderly can turn into increased spending on hospitals.
It doesn’t have to be this way. And indeed the chancellor is already adapting his plans. The Summer Budget involved a net increase in tax-raising. The ambition for reaching a surplus was put back by a year. The document published this week shows that the savings needed in 2016-17, the first year of the new Spending Review, are at the low end – £3bn – before they ramp up to £11bn in the next year and £20bn by the end of the period. At the least, this profile provides departments with a bit more time to come up with major savings programmes. The next stage in this pragmatic approach should be to introduce more insight and planning into the Spending Review – using it as an opportunity to reform public services in a lasting way rather than storing up problems for the future.
For the moment the Treasury is relying on the same techniques that they have used in the past. They have asked Departments to come up with plans for 25% and 40% savings. This request will lead to opening gambits from departments, counter-proposals from Treasury and last minute deals. A better approach would be to look more systematically across government for where savings are possible on the basis of new ways of doing things.
This greater attention to statecraft – or what the Blairites used to call “deliverology’ – is already apparent in the Implementation Task Forces that the prime minister has announced on major policy commitments such as childcare and immigration. But these are mainly at Cabinet level. The government includes a range of talented junior ministers who should be ready to contribute too.
Civil servants who have already managed significant programmes of cuts could – along with these ministers – be removed from departmental ties to head up teams that look at the potential for savings. In 2010, the chancellor took the welcome step of inviting input from outside the government too, through the Spending Challenge. Hundreds of ideas for making savings were submitted, though few were taken up. A more serious engagement with outside expertise could be introduced this time, for example, by offering entrepreneurs and small firms prizes to come up with reforms that work.
If a permanent surplus really is the aim, then achieving it will require a permanent change in how government functions. For the moment the chancellor has said very little about how he intends to create that change. The Spending Review is his opportunity to do it.