Question time, by Gemma Tetlow & Rowena Crawford

5 Nov 10
Government departments now know their budgets for the next four years. The next step is to decide what to cut

Government departments now know their budgets for the next four years. The next step is to decide what to cut

Since the coalition government’s emergency Budget in June, we have known that its plan to restore the public finances back to health will involve deep cuts to public spending – the next four years are set to be the tightest since the Second World War. Now, as a result of last month’s Comprehensive Spending Review, we know far more about which departments are to bear the brunt of the cuts and which have escaped relatively unscathed.

Under current plans, spending on departments will be 13% lower by 2014/15 than the amount Labour had planned to spend in 2010/11, after taking into account economy-wide inflation. If achieved, departmental spending would fall to just over 20% of national income, around the level it was at the turn of the century.

Even so, it represents a slightly smaller cut than was set out in the June Budget, for two main reasons. First, the Spending Review included an additional £7bn of cuts to welfare spending, which eased the squeeze on individual departments. Secondly, capital spending was given a £2bn boost. Despite this, the real-terms cuts in investment spending are going to be much deeper than those for other departmental spending, at 29% and 8% respectively.

The cuts are not being shared equally across departments. The undisputed winner is, unsurprisingly, the Department for International Development, whose budget will increase by 34% over the next four years. This is driven by the coalition agreement’s commitment to spend 0.7% of national income on overseas aid by 2013.

The other protected area was the NHS. The government promised real-terms, year-on-year budget increases over the next four years. The Spending Review indeed confirmed this, but at only 0.1% a year. In coming years, the NHS budget will have the lowest average growth over a four-year period since the early 1950s. Things will feel particularly tight given that demographic pressures require funding increases of about 1% a year simply to maintain current provision. Only two other main departments will be given real funding increases over the next four years: Energy & Climate Change for the development of green technologies and Work & Pensions for welfare reforms, which are expected to produce savings in the long run.

The biggest loser is the Department for Communities & Local Government. The local government part of the budget will be cut by over a quarter by 2014/15 and the communities part by two-thirds − largely due to reductions in spending on housing.

This was not entirely unexpected: government plans to squeeze investment spending more than non-investment spending always implied that capital-intensive departments would fare relatively badly.

However, the housing budget seems to have suffered particularly, while other capital-intensive departments have got off relatively lightly. The budget for Transport, for example, will fall by only 14.6% by 2014/15, although over half of its budget is capital spending. Another significant loser is the Department for Business, Innovation & Skills, with a budget cut of 29% by 2014/15.

We still await full details of the government’s higher education reforms, but a significant proportion of this cut is likely to be achieved by reducing the grant to universities for teaching. Spending on science will be relatively protected as it will be frozen in cash terms for four years.

Over the next month, individual departments will publish how they intend to deal with their reduced budgets. This might answer some vital questions: where can more be done with less, will the public sector start charging more for some services, or are there areas where public services will just have to be scaled back?

Gemma Tetlow and Rowena Crawford are respectively senior research economist and research economist at the Institute for Fiscal Studies

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