Spending Review 2013

Next Wednesday (26th June) the Chancellor, George Osborne, will announce the outcome of his Spending Review on departmental expenditure for 2015-16. 

The Chancellor announced in his 2010 Budget that the deficit would be balanced within four years. Those plans have been blown off course and we are still as far away in time from that target as we were in 2010 with deficit reduction stalling over the past year (with a slight increase) while overall public sector debt (driven by welfare payments and debt interest) continues to rise and currently stands at 75% of GDP.

Nonetheless the Coalition has managed making the spending cuts relatively well. There have been few U-turns and departments have been effective in reducing their costs. With the public supporting deficit reduction we have seen the Labour Party falling behind the Chancellor’s overall spending assumptions for 2015-16.

The contentious issues are around what is considered to be a fair allocation of the cuts. It is a story we do not need to rehearse. Next week’s statement will set out how the Chancellor’s plans to control ‘annually management expenditure’ (AME) primarily made up of pensions, pensioner and working age benefits. This is when the Liberal Democrats are insisting on no more cuts to working age benefits and the Prime Minister is maintaining clear blue water between the Conservatives and Labour over safeguarding pensions and pensioner benefits. This is more than a bit of Whitehall financial management and goes to the heart of the fairness debate.

What has hampered the Coalition is not executing the cuts but a lack of economic growth resulting in lower than expected tax revenues. Next week we look to decisions on the Single Local Growth Fund’s size and composition on which Nick Clegg has sought to manage expectations. While Lord Heseltine has said that it would be a ‘slap in the face’ if rumours were true that the Chancellor was proposing to award £2 billion over four years, when he recommended 25 times that amount.

On a more positive note, local government minister, Don Foster has hinted that we may have an announcement on lifting the cap on council borrowing for house building, which many have argued would have a more immediate impact on the economy.  But will it really happen? Or will we see ‘reform at the margins’ such as allowing councils to trade their borrowing headroom with each other in order to boost house building in areas that have already reached their borrowing cap.

We have been also promised news on how the Chancellor will spend the extra £3 billion a year on infrastructure – expect a critical focus on the degree to which projects are ‘shovel ready’.

Turning to the departmental allocations themselves, thirteen have ‘settled early’ but while they have agreed spending cuts of between 8% and 10% (along with savings already announced in the Budget) these represent only a third of the overall (£11.5 billion) cuts being sought.

While the Chancellor and the Prime Minister have reaffirmed their commitment to protect the budgets for health, international aid and (to a lesser degree) schools; there is a real prospect that may see more health funding being transferred into social care, the international aid budget being used to fund defence security costs and possibly loosening the protection given to schools, which may alleviate the pressure on other budgets. But we now learn that expenditure on policing counter terrorism is to be protected and the Prime Minister has said that there will be no further troop reductions.

That just piles the pressure on the remaining budgets, with reports that local government is facing a 10% (possibly an 11%) cut. This is at the mid-point of the range predicted by Institute of Fiscal Studies, though it probably does not feel that way in Town Halls up and down the country representing as does (according to the LGA) an average £30m of savings on top of existing cuts.

This is only one part of the picture as the sector receives funding from a number of different departmental budgets, including public health and transport. This means that what happens after 26 June in the Whitehall ‘wash up’ where final decisions are made on priorities within the departmental spending totals will be crucial. That process has already kicked off.

Here we learn that Eric Pickles, in the name of localism, is seeking to raid ring fenced grants (made to local government) from other departments. While this might provide some welcome local flexibility it also offers him the opportunity to mask the true extent of the cuts to the sector.

We can also expect the Government to place a greater emphasis on its notion of local government’s ‘spending power’ (which takes account of revenues from council tax and business rates) which will muddy the waters further. Does that all sound familiar?

In all this ‘toing and froing’ in getting the national picture right for Government, let’s hope that someone in Whitehall is looking across the piste, not only at the overall quantum for local government but how the settlement affects different communities; because according to the Public Accounts Committee that particular ball was dropped last time around.

This blog article was updated on 21 June, to take account of developments.

This post was written by Mark Upton, Consultant at www.publicpolicystrategies.co.uk and Associate at the Local Government Information Unit and is based on his LGiU member briefing “Spending Review 2013 – Preview”.