By Vivienne Russell | 7 June 2013
Local government could face cuts of up to 12% in the forthcoming Spending Review if the government decides to lessen the pain doled out to the Home Office and Ministry of Defence, the Institute for Fiscal Studies said today.
The economic think-tank presented an analysis of some of the chancellor’s options for the June 26 review, which will confirm departmental spending limits for 2015/16. The IFS set out what might happen to the unprotected spending areas if the government continued to protect the budgets for the NHS, schools and overseas aid and if the seven departments that have already settled with the Treasury each received an average cut of 8%.
Should Home Secretary Theresa May and Defence Secretary Philip Hammond succeed in their efforts to keep their spending relatively well protected, the burden would be shifted on to local government, along with environment, food & rural affairs, culture, media & sport, transport, and business, innovation & skills.
Were the MoD and Home Office’s cut to be just 2% each, this would translate to a 12% cut for local government. A 6% cut for home affairs and defence would mean a 10% cut for local government.
IFS deputy director Carl Emmerson said: ‘It wouldn’t be surprising if bigger-than-average cuts continued [for local government] if the Home Office and defence fare quite well.’
In his presentation, Emmerson also referred to the extent of cuts so far. He said that by 2014/15 English local authorities’ spending power was projected to be 12.2% below 2010/11 levels. But he added that there was significant variation in the size of these cuts across England, with more grant-dependent councils experiencing larger cuts to spending power.
A quarter of councils were likely to have reductions of more than 15.7%, with larger cuts in London and other metropolitan areas than in shires.
The IFS’s observations were accompanied by a presentation from the Institute for Government, which considered some of the political aspects of the Spending Review.
IfG deputy director Julian McCrae noted that austerity was likely to dominate the next two general elections, in both 2015 and 2020. Plans to balance the budget within the four years from 2010 had been blown off course by stagnant growth, and the structural deficit was now not expected to be eliminated until 2017/18.
‘With debt now forecast to peak at around 90% of GDP, deeper cuts for longer are likely to be necessary after 2017/18 if government wants public finances that could withstand another major economic shock,’ said McCrae.
He drew parallels with Canada, which experienced a 14-year fiscal contraction, from 1984 to 1998.
‘If the UK experience proves to be as drawn out as the Canadian one, we should expect not just 2015, but also 2020 to be an austerity election. Spending reductions are set to be a long-term feature of UK public finances, rather than a short and sharp experience. When the chancellor stands up to speak on June 26, will he be frank about the long-term reality of austerity?’
McCrae also noted that the Spending Review was likely to set out the size of the Single Local Growth Fund. This is the funding pot recommended by Lord Heseltine in his growth review from which Local enterprise Partnerships can bid.
He said the size of the pot was likely to undershoot the £49bn recommended by Heseltine, but would have to be far more than the £1.4bn allocated to the Regional Growth Fund over three years if the single fund were to be taken seriously.
Any response in the Spending Review to the London Finance Commission’s proposal to devolve property taxes to the London mayor and capital’s councils would be another ‘test case for decentralising power’, McCrae added.
