George Osborne will press ahead with his attack on Whitehall spending over the next five years but at a slower pace than he signalled in the summer, following better than expected forecasts of tax receipts, lower debt payments and a sale of assets.
Cuts to departmental spending will be 1.1% a year rather than the annual reduction of 1.6% planned in the July budget, saving thousands of public sector jobs that were previously earmarked for the chop.
Osborne, who said the cuts amounted to less than half of those delivered 2015-16, denied that his proposals will still result in the dismantling of large parts of the public sector.
Instead the government planned to redirect public funds to boost investment in roads and rail, pay for apprenticeships and protect vital services. Total expenditure of £733.8bn this year will rise to almost £800bn in 2020, according to official figures.
But the size of the public sector relative to national income will shrink from 38.6% to 35.5%, reducing the size of the state to its smallest level since 2000, when under the then chancellor Gordon Brown’s two-year austerity plan, it briefly dipped below 35%.
The extra funding announced on Wednesday comes under the banner of “resource departmental expenditure limits” – which covers day-to-day central government spending on public services, grants and administration.
Other spending that tends to rise and fall in line with the economic cycle – such as benefits, tax credits and pensions – falls under the heading of “annually managed expenditure”.
The distinction was drawn by Brown in an effort to stop civil servants in underspending departments from blowing the unused budget on hiring extra staff or buying paper clips. In recent years departments have often underspent, allowing the chancellor to reap larger cuts than expected.
Taking this into account, the Office for Budget Responsibility estimates that the spending review “implies additional spending of £22.9bn over the five years to 2020, relative to the numbers pencilled in by the government in July”. In real terms, after inflation is taken into account, this amounts to a 1.1% spending cut each year over the life of the parliament.
The biggest cumulative reductions in departmental spending fall on ministries outside the gilded circle of health, schools, international development and defence. The business innovation & skills department, justice ministry and transport department are among the main victims, though in each case capital spending budgets are either largely protected or, in the case of transport, handsomely increased.
Among the protected departments, education will be hit with a 1.1% loss, though the schools budget and further education will survive largely intact. In the case of further education that will be achieved through funding from the much-expanded apprenticeships scheme.
Health, including the NHS, will see a cumulative rise of 3.3%, and the cabinet office will enjoy a 4.4% boost to its funding – though its £200m budget in 2020 pales by comparison with the £124bn given to running the health service in four years time.
This pattern of spending over the parliament means that around half the reduction in public sector net borrowing as a share of GDP is accounted for by cutting day-to-day spending on public services, with the majority of that focused on unprotected departments.
In all departments, a good deal of the savings will come from the relentless cutbacks in administration costs.
The result will be that the trend of the last few years for increasingly small teams of civil servants to be in charge of budgets spent largely on services provided by private sector firms will accelerate.
Chris Brown, of the accountants EY, said: “The scale of the planned efficiency savings will almost certainly force the public sector to look at new ways to contract out and commission services.
“This will be uncharted territory for some. In some of these new outsourcing areas, even the supplier community will be unfamiliar and unproven. It is therefore vital that these contracts are carefully managed in order to provide value for money for the taxpayer and to avoid some of the mistakes we have seen in the past.”
There is also a reallocation of responsibilities within Whitehall that sometimes makes it problematic assessing the progress departments claim to be making.
A measure of the difficulties can be seen in the shift this year of the personal social services health grants previously paid by the Department of Health to the Department of Communities & Local Government’s budget. Network Rail’s infrastructure spending is now a part of the transport ministry and this simple accounting manoeuvre accounts for a large part of the boost to transport investment.
Local government has more to worry about than just the shift of personal social services, which can in part be paid for by a 2% increase in council tax, the so-called social care precept.
Councils are undergoing a shift from rock-solid central government funding to budgeting for income from increases in business rate payments alongside further rises in council tax, which are bound to prove unpopular.
Figures from the Office for National Statistics suggest that councils will fund 26% of their spending this year from council tax, 12.5% from the business rate retention scheme and 59.6% from central government grants. The percentages were 24.3%, 11.3% and 62.2% respectively in 2014-15.
Most authorities, even those in richer areas of the country, complain that they are more likely to cut their business rates than raise them, diminishing their ability to make up for an estimated £6bn reduction in the central government grant.
Nigel Keohane, the research director of the Social Market Foundation, said: “The distributional effects across England of the phasing out of £6bn of local government grant and the full localisation of business rates could be huge – with the south benefiting more than the north.
“The early effects of such decentralisation will be felt in social care funding, where the 2% social care precept will mean plenty of additional resources for those councils with a strong local tax base in the south but much less for many councils in the north.
“It is hard to see the localisation of business rates doing anything but reinforcing this inequality. This ups the ante on Osborne’s ‘active and sustained industrial strategy’ in the regions.”
Investment spending, much of it in the north and west of the country, is planned by the Treasury. Public sector net investment is due to fall from £35.8bn in 2016-17 to £30.6bn in 2018-19 before a sudden rise in 2020-21 to £41.3bn. The surprisingly strong jump in investment in the first year of the next parliament forecast by the OBR restores some of the ground lost from a cut of a third in investment spending since 2010.
But it fails to match the year-on-year increases under the last Labour government when spending increased dramatically with average real growth of 14% a year between 1997 and 2008.
