Whitehall departments face cuts of one-third

24 Jun 10
Unprotected Whitehall departments could have to implement spending cuts of up to a third over the next five years in the wake of this week's Budget
By David Williams

24 June 2010

Unprotected Whitehall departments could have to implement spending cuts of up to a third over the next five years in the wake of this week’s Budget, independent economic analysts have warned.

The Institute for Fiscal Studies made its projections on June 23, the day after Chancellor George Osborne delivered what he termed ‘the unavoidable Budget’, which was designed to eliminate the structural deficit by 2015/16.

Osborne re-stated his pledge to protect the NHS and international aid budgets, but said he would cut expenditure in other departments by an average of 25% – stripping £61bn out of departmental spending by 2014/15. This represented an increase of £17bn on top of the £44bn cuts outlined in the previous government’s March Budget.

Osborne also announced that the Comprehensive Spending Review, which is to set out in greater detail how the cuts to departmental spending will be made, will be on October 20.

The chancellor gave an early indication of how the Spending Review could stack up, hinting that the education and defence departments would face smaller reductions.

But according to IFS calculations, a 10% cut to those departments would necessitate reductions of 33% elsewhere in government to hit Osborne’s £61bn target.

IFS director Robert Chote said the cuts to central government spending on services will ‘more than reverse the entire increase we saw under Labour. We are looking at the longest, deepest, sustained period of cuts to public services spending since the Second World War.’

He said no government since 1945 has reduced departmental spending for six years in a row and there have never been two consecutive years without real-terms growth in the NHS.   

Osborne also set out plans to save £11bn by reducing welfare costs. Most of this will be by linking annual increases in payments to the consumer price index for inflation, rather than the retail price index, which tends to be higher.

Further savings are to be made through introducing medical tests for Disability Living Allowance claimants, bringing in caps for Housing Benefit, freezing Child Benefit for three years and reducing Child Tax Credits for better-off families.

When welfare and benefit payments are taken into account, the government is still planning to spend at 2003 levels while taxing at 2007 levels, the IFS said.

Economics professor Michael Ben-Gad, of City University, said the government had set the bar deliberately high in the knowledge that it would probably miss its targets and be forced to make concessions over the coming years.

‘I very much doubt whether we will reach 2014/15 with anything like the cuts Osborne announced,’ he told Public Finance.

‘They will find it gets harder and harder, there won’t be as many savings as they anticipated, and they will have to soften their approach. But by setting such an ambitious programme, they start with a much stronger negotiating position.’

He added that quick gains from getting people off welfare were also very unlikely, as the recession was limiting employment opportunities. Furthermore, dependency on benefits was ingrained among many claimants.

Osborne’s claim that his Budget was ‘progressive’ has divided critics. Chote described the assertion as ‘debatable’, pointing out that the very poorest 10% of families were hit ‘relatively hard’.

Ian Mulheirn, director of the Social Market Foundation, said the Budget – which will lift 880,000 out of income tax by raising the threshold by £1,000 to £7,475 – had a ‘reasonable claim to being progressive’, particularly for those in work but on low wages.

But, he added, those reliant on welfare would be hit hard by the VAT increase and squeezes in housing benefit. And cuts to departmental spending ‘will affect services that less well-off people depend on more’, he said. ‘It’s progressive today but what it implies for the future is very bleak.’

Mulheirn added that the Budget could have been more progressive by introducing means testing for child benefit, and reconsidering provisions for pensioners that Osborne left untouched, such as free television licences and winter fuel payments.

Poverty campaigners were unconvinced. The Child Poverty Action Group said raising money through income tax would have been better for low-income families than increasing VAT.

Policy head Imran Hussain called it ‘at best a do-nothing Budget’, which he said increased the risk of the government missing its pledge to end child poverty by 2020.

Meanwhile the Joseph Rowntree Foundation said that while the £2bn handout in the form of increased Child Tax Credits was ‘very significant’, it would only serve to balance other benefit cuts.

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