Darling refuses to confirm where funding axe will fall
By Tash Shifrin
10 December 2009
Public sector bodies were left in suspense over their future funding after Chancellor Alistair Darling refused to set out spending plans beyond 2010/11 in his Pre-Budget Report on December 9.
Darling announced that planned departmental spending totals would be maintained for 2010/11. After this, public sector current expenditure would grow by an average of 0.8% a year from 2011/12 to 2014/15 – slightly higher than the 0.7% growth set out in the April Budget.
But this figure is likely to mean severe real-terms cuts across much of Whitehall, as spending on non-departmental items, such as social security and debt repayment, will grow at a far higher level.
Darling refused to elaborate on where the axe would fall, telling MPs: ‘As long as extraordinary uncertainties remain in the world economy, this is not a time for a Spending Review.
‘We have already set out clear and firm departmental budgets for the next financial year, but to try and fix each department’s budget now, for the next five years, is neither necessary or sensible.’
The chancellor did pledge to protect 95% of NHS spending for 2011/12 and 2012/13, while schools’ funding would rise by 0.7% a year and spending on 16–19 education by 0.9% a year over the same period. Police authorities would be funded to maintain current staffing levels.
Darling said this would be underpinned by the 0.5% hike in National Insurance contributions – a surprise announcement alongside the expected return to a 17.5% VAT rate. The NI rise would raise £3bn a year from 2011/12.
The PBR included a public spending ‘giveaway’ of £7.7bn in 2011/12 and £6.9bn the following year – although this was not explicitly linked to the NHS and education announcements – along with a headline-grabbing tax on bankers’ bonuses.
But the giveaway was more than matched by plans to claw back money from the public sector, including £12bn from greater efficiency and £5bn from ‘scaling back or cutting lower priorities’.
Another £4.5bn would be saved by imposing a 1% cap on pay rises for 3.9 million public sector staff for two years, along with a limit on their employers’ pension contributions.
The NHS, despite protection for frontline service funding, would be expected to produce £10bn of value-for-money savings by 2012/13, the PBR said.
Darling told the Commons his package would mean ‘cuts to some budgets, as programmes come to an end or resources are switched to new priorities’.
Some programmes would ‘need to be stopped altogether’, he said.
Carl Emmerson, deputy director of the independent Institute for Fiscal Studies, criticised Darling’s refusal to set out future spending plans more clearly because of economic uncertainty. ‘That argument is weaker when he says the world is certain enough to protect 95% of NHS, schools and police spending.’
He predicted that other major spending areas, such as housing, transport and higher education, would ‘bear the brunt’ of the squeeze on the public finances.
‘He’s made the spending squeeze less harsh. It will be very harsh for public services – not very, very harsh. How’s he done that? He’s raised tax and borrowed more.’
Darling’s admission that borrowing for this year would hit £178bn – up from the £175bn figure he set out in April – drew fire from opposition politicians.
Shadow chancellor George Osborne said he had ‘failed’ again to set out a credible plan to restore the public finances. ‘It would be difficult to imagine that this forecast for borrowing would be an underestimate. But so it turned out to be,’ Osborne taunted.
Economists also criticised Darling’s fiscal plans. The National Institute of Economic and Social Research said: ‘The chancellor has announced plans to raise an additional £5bn by 2012/13, mainly through a further increase in National Insurance contributions.
‘These increases are necessary to simply keep the projections for the budget deficit similar to those in Budget 2009. They do nothing to address the structural budget deficit, which we estimate to be around £90bn in today’s terms.’
Emmerson added that, despite signs of economic recovery, the chancellor had offered ‘no acknowledgement’ of the need for fiscal tightening to restore the public finances. ‘He’s not getting us back to balance despite being faced with a smaller problem.’