Of all the challenges facing the civil service in this parliament, the biggest will be the further squeeze in public spending following this year’s review. Some departments will be much more severely affected than others, but the result will be substantial changes in the way Whitehall operates and services are delivered.
We had a first instalment in early June when George Osborne announced £4.5bn of in-year cuts in the current 2015-16 financial year. This is a familiar exercise by chancellors immediately after general elections. But the total figure is misleading. Around half is due to come from one-off items such as the sale of shares in Royal Mail and land around King’s Cross. Some of the rest will come from altering the timing of spending between financial years, which does not affect the underlying pattern of expenditure. In other cases, departments are signing up early to expected underspends and familiar, more peripheral cost savings. According to an analysis by my Institute for Government colleague Julian McCrae, the real victims have been public health, the Department for the Environment, Food and Rural Affairs, and the Department of Business, Innovation and Skills.
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Much more important, of course, is the spending review over the next few months. Mr Osborne has talked of planned savings of £30bn by 2017-18, including £12bn of savings in welfare spending. (The latter will be hard to achieve and is likely to involve cuts on one or more of the following: tax credits, housing benefit and disability and incapacity benefits). After adjusting for the costs of servicing government debt and protected spending on pensions, this implies cuts in departmental budgets of 2.2% a year for the next three years in real terms, slightly more than the average 2% annual cut over the past five years, according to the Institute for Fiscal Studies.
However, health, schools and overseas aid are protected programmes – and there is a firm promise to spend an extra £8bn on the NHS. There are also commitments to spend more on adult social care, childcare and on higher education, following the removal of the upper limit on numbers of students. This indicates bigger cuts in other programmes, of a further 15.3% over the three years to 2018-19, according to the IFS. This would mean a cumulative cut to unprotected departments of nearly a third over eight years.
This covers Defence; the Home Office; the Ministry of Justice; Communities and Local Government; Business, Innovation and Skills; and Transport. As the IFS points out, protecting Defence against further cuts in real terms would not only be insufficient to prevent a fall in its share of national income, but it would also mean additional cuts elsewhere, of nearly 19% over three years, and 37% over eight years.
The government has had a good record in squeezing spending over the last few years but it is going to be harder in future, not least because the more obvious cuts and “efficiency savings” have been made (for some reason these are often referred to as “low hanging fruit”), while there are substantial extra pension costs. It will also be difficult to hold down public sector pay if it is rising again in the private sector.
The public sector is already stretched. The review has to be more than a simple financial exercise. There have to be proper plans for implementation. If the cuts are to be real and sustainable, there will have to be major changes in the way that Whitehall operates and delivers public services. David Cameron has sensibly avoided major changes to the machinery of government since these have often proved to be disruptive and wasteful.
But there will have to be big organisational changes, and no doubt further cuts in numbers of staff employed. There has been much talk about a big extension of the digital provision of services, and now is the time for these to be demonstrated. Moreover, locally provided services need to work together in different ways, most importantly the NHS and social care providers in dealing with elderly people. That will be a big test of the government’s renewed commitment to decentralisation.
The key, as the IfG has argued, is for cutbacks to be seen to protect service quality, in order to be politically sustainable and acceptable. The case has to be made for the necessity of further cutbacks and that is much harder in 2015 than in 2010. This is not just about “fairness”. Even the OECD, which backs Mr Osborne’s overall programme, has been urging him to even out the profile of cuts in order to lessen the damage to economic growth. This refers to current plans where steep cuts over the next three years are supposed to be followed by higher spending, and presumably tax cuts, ahead of the 2020 general election.
What is without doubt is that there will be pain first for many in government and the wider public sector.