By Peter Riddell
7 October 2010
One senior official recently remarked that ministers and civil servants will be so exhausted by then that a second, fresh team should be ready to take over the equally hard task of implementation.
The tortured negotiations over big spending cuts across the government have always involved a mixture of ritual and substance. The review is destined to succeed since a failure to agree cuts on the scale foreshadowed by Osborne in the June Budget would be a political and financial disaster for the coalition.
As in all such reviews, there have been leaks about blood-curdling cuts striking at the heart of public services and murmurs from Whitehall about the impossibility of meeting the Treasury’s targets. These have been followed by threats of resignations, dramatic stories about meetings between the chancellor and ministers, the summoning of the Star Chamber committee, and last minute interventions by the prime minister and, this year, the deputy prime minister.
It is very much a Treasury-driven review. Crucially, it is Osborne and not a neutral minister who is chairing the public spending/Star Chamber committee. The resulting tensions were underlined by the recent leak of a letter from Liam Fox, the defence secretary, to David Cameron expressing dismay at the scale of the proposed cuts, and the dominance of Treasury rather than defence priorities in the exercise. His letter noted that ‘this process is looking less and less defensible as a proper SDSR (Strategic Defence and Strategy Review) and more like a “super CSR” (Comprehensive Spending Review). If it continues on its current trajectory it is likely to have grave political consequences for us, destroying much of the reputation and capital you, and we, have built up in recent years.’
However, whatever the collateral political damage, all will be sorted out so that Osborne can appear the serious economic statesman when he delivers his October 20 speech.
The substance of course matters enormously. But at present the main focus is on overall departmental allocations – and this will form the bulk of Osborne’s statement. The figures will be spectacular enough with cuts of up to 25% over four years in many major departments. Of course, everyone will be watching to see how departments will come off relative to each other. What do the pledges to protect the NHS and international development mean in practice — and how far will there be relative protection for schools and the law and order budgets?
The first of the announcements to be closely watched is defence. How far will the Royal Air Force and the Royal Navy be squeezed to finance the continuing, mainly Army, commitment to Afghanistan? If both new aircraft carriers are retained, will one be kept in reserve? And what formula will be used for the replacement of the Trident nuclear deterrent?
Second is tuition fees. The Lord Browne review will report in the week of October 11. It will be necessary to find a formula that raises money for the universities, eases the demands on the Treasury and reconciles, or at least keeps in balance, the differing views of the Liberal Democrats and the Conservatives.
Finally, there is work and pensions. Some figures will, at least, have to be included about the expected level of savings from reforming housing and incapacity benefits, and the cost of the new benefits system proposed by Work and Pensions Secretary Iain Duncan Smith, even though the details are likely to come later. Despite some tense talks in the summer, Osborne has agreed at least an outline plan for welfare reform and the new Universal Credit and has already announced the end of Child Benefit for the middle classes.
But it is only after October 20 that we will learn what this means for specific programmes. It is likely to take several weeks, even months, for this to work through. This autumn’s local authority settlement will give a good indication of the impact of the Spending Review, followed by the decisions that local authorities will have to take over school and other budgets. There will be parallel statements in the NHS.
In central government, departments will be working out the implications for staff numbers. The civil service might shrink by a quarter from its present half a million employees. But how quickly should this be done? Ministers are torn between getting the pain over quickly and spreading the impact over the four years of the Spending Review period. Private sector management practice would point to the former. It is better for the morale of an organisation to take a big painful hit in staff numbers and redundancies and then to regroup and carry on. The major Swedish and Canadian spending cuts exercises offer a similar lesson, according to recent seminars at the Institute for Government. Quick, sharp action tends to be more beneficial for the bigger organisations.
Long-drawn-out cuts tend to damage morale far more as the remaining staff fear they will be the victims of the next round of redundancies. However, some ministers are wary of cutting too much too soon – say, doing all the staff cuts over two years rather than four years – for fear that the Treasury will pocket any early cuts and then demand more. Ministers are also worried about the morale of their civil servants faced not only by cuts in numbers but also a two-year pay freeze and the potential changes from John Hutton’s public sector pension review.
Moreover, it will be impossible to achieve such sizeable cuts in staff numbers across Whitehall without compulsory redundancies – and that costs money. There will have to be pots of reorganisation money to finance such redundancies.
Much, in practice, will depend on the success of the efficiency and reform policies being implemented by Ian Watmore, as chief operating officer under the ministerial direction of Cabinet Office minister Francis Maude and Chief Secretary to the Treasury Danny Alexander. The choice presented to departments is essentially between making administrative savings and closing frontline services: head office staff versus school classrooms. Of course, it is not as simple as that since frontline services are bound to be cut: the question is by how much.
This programme has already resulted in the moratorium on new advertising and on recruitment. In addition, there are much tighter controls on new IT projects and on procurement, with claims already of savings of several hundred million pounds. There is more to be saved from tightening procurement, taking advantage of central government’s buying power to achieve better value for money, and by improving the use of property.
The reform programme also involves several other strands. There have already been leaks about cuts in quangos and arm’s-length bodies. Many household name bodies are threatened with extinction, merger or absorption back into their sponsoring departments. Quangos have such a bad reputation that it makes easy headlines for ministers to claim to be culling unnecessary, interfering and unelected ‘pen pushers’.
The reality is more complicated, as the Institute for Government noted in its recent report, Read before burning. First, more than half of all quangos are small advisory bodies with no staff or budgets, so any savings from abolition will be minor. Secondly, just 15 executive non-departmental bodies account for more than three-quarters of total spending by quangos, but three-quarters of their money is passed on to other bodies. So merely abolishing these quangos will not of itself save large sums of money. Savings will only be made if the state cancels or cuts back the underlying programmes.
Thirdly, the scope for making savings where functions are transferred or merged is often small and reorganisations carry the risk of losing expert staff and stirring up disproportionate public anger. Fourthly, bringing functions back within government departments might increase ministerial control, jeopardising both transparency and the independence from political control on which the reputations of many quangos depend.
There is certainly a case for reviewing quangos. But it is vital not to generalise and to be clear about the potential benefits and costs in each case. An announcement before October 20 is likely with perhaps half the current total of quangos facing significant changes, from abolition to merger and absorption within departments.
In addition to these financial changes, the reform programme also involves the creation of departmental boards chaired by Cabinet ministers (with roughly a third of the members being non-executive directors under the lead of Lord Browne). This is intended to tighten up on the management of big projects, notably in IT, in the hope of producing long-term savings. These changes are being viewed sceptically by some permanent secretaries who wonder about the ministerial appetite, and aptitude, for being involved in the management of departments.
The aftermath of the Spending Review will be political. Ministers are preparing themselves for protests and strikes. These might inconvenience voters, as strikes by London Underground workers already have, but they will not stop the cuts.
The review presents a big challenge to Ed Miliband, who was narrowly elected Labour leader thanks to the support of public sector unions and their members. He is under pressure from union leaders to back protests. In his early remarks, he has condemned ‘irresponsible strikes’ – a meaningless statement since unions would say they do not call such strikes.
He has accepted the case for deficit reduction and has said he is prepared to back ‘painful’ cuts. But, while criticising the scale and speed of the coalition’s planned deficit reduction, he has been ambivalent about former chancellor Alistair Darling’s pre-election proposals to halve the deficit in four years. He has not identified any specific cuts, apart from saying more of the burden should fall on higher taxes.
The main challenge will come as the details of the cuts at a local level start to emerge in later weeks and early next year. That is when we will hear from teachers, doctors, nurses and the police, and from backbench MPs protesting on their behalf. The worst time might be next spring when the full scale of the redundancies becomes apparent. That is when there are elections for the devolved bodies in Scotland and Wales and in more than four-fifths of English councils. Poor results for the Liberal Democrats, already languishing in the mid-teens in the polls, will cause strains in the coalition.
But despite vocal protests from some LibDem – and even Tory – MPs and possible defections by some councillors, the coalition is likely to stick together. Osborne and his colleagues realise that to persuade voters of the necessity, and unavoidability, of the cuts will take time – not just weeks or months, but years.
Peter Riddell is a senior fellow of the Institute for Government and a political commentator
7 October 2010
The chancellor’s statement on October 20 has been billed as a Spending Review like no other, with 25% cuts expected across most departments. But the full impact will only be understood years down the line, argues Peter Riddell
Chancellor George Osborne’s Spending Review statement on October 20 is only the beginning, not the end. For most Whitehall departments, local authorities, schools, hospitals and GPs, the Osborne announcement will be just the start of a long process of painful adjustment.One senior official recently remarked that ministers and civil servants will be so exhausted by then that a second, fresh team should be ready to take over the equally hard task of implementation.
The tortured negotiations over big spending cuts across the government have always involved a mixture of ritual and substance. The review is destined to succeed since a failure to agree cuts on the scale foreshadowed by Osborne in the June Budget would be a political and financial disaster for the coalition.
As in all such reviews, there have been leaks about blood-curdling cuts striking at the heart of public services and murmurs from Whitehall about the impossibility of meeting the Treasury’s targets. These have been followed by threats of resignations, dramatic stories about meetings between the chancellor and ministers, the summoning of the Star Chamber committee, and last minute interventions by the prime minister and, this year, the deputy prime minister.
It is very much a Treasury-driven review. Crucially, it is Osborne and not a neutral minister who is chairing the public spending/Star Chamber committee. The resulting tensions were underlined by the recent leak of a letter from Liam Fox, the defence secretary, to David Cameron expressing dismay at the scale of the proposed cuts, and the dominance of Treasury rather than defence priorities in the exercise. His letter noted that ‘this process is looking less and less defensible as a proper SDSR (Strategic Defence and Strategy Review) and more like a “super CSR” (Comprehensive Spending Review). If it continues on its current trajectory it is likely to have grave political consequences for us, destroying much of the reputation and capital you, and we, have built up in recent years.’
However, whatever the collateral political damage, all will be sorted out so that Osborne can appear the serious economic statesman when he delivers his October 20 speech.
The substance of course matters enormously. But at present the main focus is on overall departmental allocations – and this will form the bulk of Osborne’s statement. The figures will be spectacular enough with cuts of up to 25% over four years in many major departments. Of course, everyone will be watching to see how departments will come off relative to each other. What do the pledges to protect the NHS and international development mean in practice — and how far will there be relative protection for schools and the law and order budgets?
The first of the announcements to be closely watched is defence. How far will the Royal Air Force and the Royal Navy be squeezed to finance the continuing, mainly Army, commitment to Afghanistan? If both new aircraft carriers are retained, will one be kept in reserve? And what formula will be used for the replacement of the Trident nuclear deterrent?
Second is tuition fees. The Lord Browne review will report in the week of October 11. It will be necessary to find a formula that raises money for the universities, eases the demands on the Treasury and reconciles, or at least keeps in balance, the differing views of the Liberal Democrats and the Conservatives.
Finally, there is work and pensions. Some figures will, at least, have to be included about the expected level of savings from reforming housing and incapacity benefits, and the cost of the new benefits system proposed by Work and Pensions Secretary Iain Duncan Smith, even though the details are likely to come later. Despite some tense talks in the summer, Osborne has agreed at least an outline plan for welfare reform and the new Universal Credit and has already announced the end of Child Benefit for the middle classes.
But it is only after October 20 that we will learn what this means for specific programmes. It is likely to take several weeks, even months, for this to work through. This autumn’s local authority settlement will give a good indication of the impact of the Spending Review, followed by the decisions that local authorities will have to take over school and other budgets. There will be parallel statements in the NHS.
In central government, departments will be working out the implications for staff numbers. The civil service might shrink by a quarter from its present half a million employees. But how quickly should this be done? Ministers are torn between getting the pain over quickly and spreading the impact over the four years of the Spending Review period. Private sector management practice would point to the former. It is better for the morale of an organisation to take a big painful hit in staff numbers and redundancies and then to regroup and carry on. The major Swedish and Canadian spending cuts exercises offer a similar lesson, according to recent seminars at the Institute for Government. Quick, sharp action tends to be more beneficial for the bigger organisations.
Long-drawn-out cuts tend to damage morale far more as the remaining staff fear they will be the victims of the next round of redundancies. However, some ministers are wary of cutting too much too soon – say, doing all the staff cuts over two years rather than four years – for fear that the Treasury will pocket any early cuts and then demand more. Ministers are also worried about the morale of their civil servants faced not only by cuts in numbers but also a two-year pay freeze and the potential changes from John Hutton’s public sector pension review.
Moreover, it will be impossible to achieve such sizeable cuts in staff numbers across Whitehall without compulsory redundancies – and that costs money. There will have to be pots of reorganisation money to finance such redundancies.
Much, in practice, will depend on the success of the efficiency and reform policies being implemented by Ian Watmore, as chief operating officer under the ministerial direction of Cabinet Office minister Francis Maude and Chief Secretary to the Treasury Danny Alexander. The choice presented to departments is essentially between making administrative savings and closing frontline services: head office staff versus school classrooms. Of course, it is not as simple as that since frontline services are bound to be cut: the question is by how much.
This programme has already resulted in the moratorium on new advertising and on recruitment. In addition, there are much tighter controls on new IT projects and on procurement, with claims already of savings of several hundred million pounds. There is more to be saved from tightening procurement, taking advantage of central government’s buying power to achieve better value for money, and by improving the use of property.
The reform programme also involves several other strands. There have already been leaks about cuts in quangos and arm’s-length bodies. Many household name bodies are threatened with extinction, merger or absorption back into their sponsoring departments. Quangos have such a bad reputation that it makes easy headlines for ministers to claim to be culling unnecessary, interfering and unelected ‘pen pushers’.
The reality is more complicated, as the Institute for Government noted in its recent report, Read before burning. First, more than half of all quangos are small advisory bodies with no staff or budgets, so any savings from abolition will be minor. Secondly, just 15 executive non-departmental bodies account for more than three-quarters of total spending by quangos, but three-quarters of their money is passed on to other bodies. So merely abolishing these quangos will not of itself save large sums of money. Savings will only be made if the state cancels or cuts back the underlying programmes.
Thirdly, the scope for making savings where functions are transferred or merged is often small and reorganisations carry the risk of losing expert staff and stirring up disproportionate public anger. Fourthly, bringing functions back within government departments might increase ministerial control, jeopardising both transparency and the independence from political control on which the reputations of many quangos depend.
There is certainly a case for reviewing quangos. But it is vital not to generalise and to be clear about the potential benefits and costs in each case. An announcement before October 20 is likely with perhaps half the current total of quangos facing significant changes, from abolition to merger and absorption within departments.
In addition to these financial changes, the reform programme also involves the creation of departmental boards chaired by Cabinet ministers (with roughly a third of the members being non-executive directors under the lead of Lord Browne). This is intended to tighten up on the management of big projects, notably in IT, in the hope of producing long-term savings. These changes are being viewed sceptically by some permanent secretaries who wonder about the ministerial appetite, and aptitude, for being involved in the management of departments.
The aftermath of the Spending Review will be political. Ministers are preparing themselves for protests and strikes. These might inconvenience voters, as strikes by London Underground workers already have, but they will not stop the cuts.
The review presents a big challenge to Ed Miliband, who was narrowly elected Labour leader thanks to the support of public sector unions and their members. He is under pressure from union leaders to back protests. In his early remarks, he has condemned ‘irresponsible strikes’ – a meaningless statement since unions would say they do not call such strikes.
He has accepted the case for deficit reduction and has said he is prepared to back ‘painful’ cuts. But, while criticising the scale and speed of the coalition’s planned deficit reduction, he has been ambivalent about former chancellor Alistair Darling’s pre-election proposals to halve the deficit in four years. He has not identified any specific cuts, apart from saying more of the burden should fall on higher taxes.
The main challenge will come as the details of the cuts at a local level start to emerge in later weeks and early next year. That is when we will hear from teachers, doctors, nurses and the police, and from backbench MPs protesting on their behalf. The worst time might be next spring when the full scale of the redundancies becomes apparent. That is when there are elections for the devolved bodies in Scotland and Wales and in more than four-fifths of English councils. Poor results for the Liberal Democrats, already languishing in the mid-teens in the polls, will cause strains in the coalition.
But despite vocal protests from some LibDem – and even Tory – MPs and possible defections by some councillors, the coalition is likely to stick together. Osborne and his colleagues realise that to persuade voters of the necessity, and unavoidability, of the cuts will take time – not just weeks or months, but years.
Peter Riddell is a senior fellow of the Institute for Government and a political commentator
