By Tony Travers | 1 May 2013
The June Spending Review is going to slice Whitehall’s funding cake so thinly that departments will be left fighting over the crumbs. So how are public services meant to cope?
The recent passing of Margaret Thatcher provided Britain with a fascinating reminder of the way in which government – or, in her case, a powerful government leader – can affect the ways we think about the state and public expenditure. No prime minister in modern times was more associated with concepts such as ‘good housekeeping’ and ‘rolling back the frontiers of the state’. Her government drove down public spending as a share of gross domestic product and cut tax as far and as fast as it could.
Mrs Thatcher remains a powerful influence on the way British politicians think about spending and tax. The chancellor is currently preparing a Spending Review for 2015/16, which will be published on June 26. As a result of the timing of the 2013 spending plans, and whatever the outcome of the next general election, there will need to be a further review for the years 2016/17 to 2018/19. Given the short time between an election in, say, May 2015 and April 2016, we can confidently predict this next review will be published in October 2015, by which time the funding cake will have shrunk even more.
Cabinet ministers have been furiously lobbying to avoid further cuts to ‘unprotected’ services. Theresa May (Home Office), Chris Grayling (Justice), Philip Hammond (Defence) and Eric Pickles (Communities & Local Government) are widely reported to have said ‘enough is enough’ in relation to the protection given to the NHS, schools, international development and welfare spending. This so-called ‘National Union of Ministers’ has argued that further rounds of spending cuts must be spread across a wider range of provision.
May and Pickles were partly successful in protecting police and local government from an additional spending reduction in 2013/14, although they seem likely to have to make a further cut to their budgets in 2014/15. Councils already face deeper cuts in 2014/15 than this year as the result of previously set plans.
The prognosis for the future is not good for local government, the police, fire & emergency services, the justice system, defence, the environment and business support. The 2015 Spending Review will either have to remove the ring-fences from protected services or continue the post-2011 pattern of concentrated cuts to a limited number of services.
It is worth remembering that Labour was expected to publish a Spending Review in 2009 but postponed it until after the general election. At the time, there was deep concern within Gordon Brown’s government about the cuts that would have to be revealed by such an awkwardly timed publication. When the 2015 election is held, all the parties will be fighting on the basis of unknown detail about future spending plans.
Chancellor George Osborne has revealed headline totals for spending up to 2017/18, but there is no departmental breakdown. It will be possible for the Conservatives (and perhaps the Liberal Democrats) to challenge Labour as to whether they would keep to the overall total of expenditure. But Labour leader Ed Miliband and his shadow chancellor Ed Balls will doubtless argue that they must wait until they see the books before they determine their tax and expenditure plans.
The odd couple of Vince Cable and Liam Fox have also called in their different ways for a removal of ring-fences from the protected services. Speaking on the BBC Radio 4 Today programme, Business and Skills Secretary Cable stated: ‘The problem about ring-fencing as an overall approach to policy is that when you have 80% of all government spending ring-fenced, it means all future pressures then come on things like the army, the police, local government, skills and universities [and] the rest that I’m responsible for. So you get a very unbalanced approach to public spending.’
Former defence secretary Liam Fox, an economically ‘dry’ Conservative, has argued for the removal of ring fences to make room for tax cuts. It currently seems likely that local government, along with other non-ringfenced services, will face real-terms reductions of at least 50% in expenditure over the period 2011/12 to 2017/18.
It is interesting to muse on how different things might have been by the end of 2014/15 if the NHS, schools, international development and welfare expenditure had fallen in line with local government revenue spending over the period since the 2010 Spending Review. These four ‘protected’ current budgets totalled £327bn in 2010/11, rising to £360bn in 2014/15. In the same period, local government’s current spending power will have declined, on average, by about 15%. Had spending on the protected services fallen by this same 15%, it would be £278bn in 2014/15. If this had happened and other things being equal, the deficit would have been £80bn lower in 2014/15 than currently projected.
Alternatively, if there had been no ring-fencing and the government’s overall Total Managed Expenditure had grown at the rate it has, local government, the police, justice, business support, the environment, defence and other unprotected services would be spending 10%–15% more in 2014/15 than, in reality, they will. Conversely, expenditure on the NHS and welfare would be substantially lower than currently proposed.
Total Managed Expenditure is the grand, overall, figure for all on-balance sheet spending by the public sector. It’s made up of Departmental Expenditure Limits (DEL) – spending by departments and their agencies that can be limited from year to year – and Annually Managed Expenditure (AME), which is generally demand-driven, such as welfare spending. While the rules for allocating such spending can be set in advance, actual levels will depend on economic and social factors. One of the reasons welfare spending will have risen by £20bn more than the coalition expected over the period 2011/12 to 2014/15 is that it falls within AME.
Chancellor Osborne recently quipped that AME is ‘annually unmanaged expenditure’, probably reflecting his desire to reduce it. The reality with this spending is that although ministers can change entitlement rules and/or benefit levels, they cannot control the number of people claiming benefits. However, in the Budget, Osborne made the radical announcement that: ‘The government will strengthen the public spending framework by introducing a firm limit on a significant proportion of Annually Managed Expenditure, including areas of welfare expenditure.’
After more than three years in office, the chancellor has decided to try to get a grip on the overall size of the welfare budget. But such a step is fraught with danger, particularly because over half of the overall amount paid in welfare is to pensioners. It seems likely that ‘areas of welfare expenditure’ that would be ring-fenced would include pensions.
A culture war is currently under way in relation to the future of the welfare system, including a thread of debate about ‘strivers’ and ‘scroungers’. The baleful case of Mick Philpott and the killing of six of his children in a deliberately started fire acted as a catalyst for a further struggle between politicians. Labour, although it has criticised the government’s rhetoric and welfare changes, has begun to think radically about the reform of the system. Shadow work and pensions secretary Liam Byrne has spoken of linking welfare entitlements to previous contributions. Those who had paid more in taxes might, for example, qualify for social housing ahead of those who had paid less.
The government and the Opposition sense the public wants radical reform and lower social security spending.
The Francis report into the Mid Staffordshire hospital trust has also affected debate about the future of public services. Health Secretary Jeremy Hunt has appointed a new chief inspector of hospitals and increased the importance of patients’ experience within the NHS. While there is no evidence that the public has fallen out of love with the NHS as a result of the Mid Staffs scandal, it seems likely that ministers will feel emboldened to continue with the programme of reform that took effect on April 1.
The future of the NHS, the reform of the welfare system and the post-2015 pattern of public expenditure form part of a longer-term challenge for governments of all parties. As the post-2008 ‘near-depression’ continues across Europe and the United States, it appears inevitable that there will be insufficient economic growth to lift tax revenues to anything like the degree necessary to eradicate the UK’s public sector deficit before, say, 2018.
Even were an incoming government in 2015 to increase public expenditure slightly (and thus, of course, the deficit), Britain would not return to a period of generous growth in public provision.
If Labour took office, it would be under massive pressure to increase real expenditure on the NHS and schools. Miliband would find it hard to reduce spending on welfare and international development. There would be a risk that the currently ‘protected’ services would be the ones where additional resources were concentrated.
All political parties find it hard to raise the level of tax. George Osborne, like Gordon Brown and Alistair Darling before him, projects the UK tax take at 38% of GDP for each year up to 2017/18. No government appears willing to raise this percentage, even though the average longer-term level of public expenditure is closer to 42% of GDP. Unless and until the tax percentage can be lifted, it is inevitable that public spending as a proportion of GDP will need to fall back towards 38%.
Governments are afraid of the electorate and, in particular, fearful of raising perceptible taxes for anyone apart from the rich. The suppression of council tax is almost certainly popular, simply because it is so easily understood. If the UK is to support public expenditure at between 42% and 45% of GDP, it would be necessary to raise taxes as a share of GDP to broadly the same levels. There is no way it would be possible to deliver such a big rise in taxation without increasing the taxes paid by average earners.
The UK is thus in a position where pressure on public expenditure will continue for several years to come. Even when the deficit is gone, there will still be the problem of the need to finance a bigger state than taxation at 38% of GDP can sustain.
This issue, in microcosm, will be tested at this year’s local polls on May 2. There are elections in the counties, a number of unitaries and districts in England. Last time these authorities voted, the Labour Party was at a low ebb. This time, there is likely to be a big swing from the Conservatives and LibDems to Labour.
However, unless there is a full-scale meltdown of the Tory and LibDem vote, it will still suggest that Labour has a long way to go to convince the electorate it can be trusted with the economy. Conditions could hardly be better for an Opposition party, but Labour’s opinion poll lead is relatively modest. Miliband needs, among other things, to produce convincing policy about the future of public services at a time when there will be little or no additional resources.
Although we are well past Thatcher’s era, her legacy lives on in the struggle to contain contemporary public spending and improve services. The 2013 Spending Review will create a portal to the more complex one after the next general election. It seems likely that budgetary protection will have to be reduced, at least for expenditure on benefits. Some kind of Plan A+ may yet find its way onto the agenda, at least with regard to spending on infrastructure. The longer-term outlook for public sector current spending remains bleak.
The cuts made so far and those that lie ahead far exceed anything Mrs T achieved. David Cameron, Nick Clegg and Ed Miliband are indeed her heirs.
Tony Travers is the director of LSE London, a research centre at the London School of Economics examining local government and public finance. He will be speaking at this year’s CIPFA conference, being held in London on July 9–11. This feature was first published in the May 2013 issue of Public Finance
