Today’s Spending Review

By Daniel Kenealy

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At 12.30 today the Chancellor, George Osborne, will be on his feet at the despatch box in the House of Commons to deliver his Spending Review. There’ll be a lot to pick over throughout the afternoon and evening, and evne into tomorrow no doubt. But here are some of the key things to look for.

Unprotected departmental spending. We can expect deep cuts to unprotected government departments announced in today’s Spending Review. Remember that NHS spending, international development, defence, intelligence, and the 5-16 schools budget are all ringfenced from cuts. Overall, about 5% of departmental spending will be cut but, because of the large protected areas, that means cuts of between 25 and 30% in the unprotected areas. Several departments have already settled with the Treasury, agreeing to cuts averaging 24% between 2015/16 and 2019/20.

What will be of most interest today is how roughly £18 billion of cuts (as calculated by the Resolution Foundation) will be apportioned. The remaining departments with big enough budgets to make significant contributions include the Home Office, the Ministry of Justice, the local government budget, the non-schools budget of the Department for Education, and the Department for Business. That could mean significant cuts to policing (politically sensitive in the aftermath of the Paris attacks), local government (including social care, which cuts against the Chancellor’s commitment to ensure that the NHS), higher education, and parts of the education budget that will have a direct impact on the delivery of 5-16 schooling.

What is clear, and as Resolution shown beautifully in these charts, the shape of the British state will be changed as a result of the Spending Review, with health, education and defence accounting for two-thirds of day-to-day spending by 2019/20, and spending on almost everything else squeezed to just 16% of the total.

NHS spending. There has been an ongoing spat between the Treasury and the NHS England chief executive, Simon Stevens, about how much of the £8 billion in extra spending promised by the Chancellor will be delivered up front. Some have suggested it will be put in in four increments of c. £2 billion, with health experts arguing that NHS England needs a bigger up-front cash injection. The Chancellor fears that an up-front injection might ease the pressure on NHS England to find the efficiency measures he thinks are deliverable. The Prime Minister himself may have had to get involved in settling this particular issue. What’s less in doubt is the headline amount, but it’ll be interesting to see today the shape of the budget for NHS England over the next four years.

Tax credits. Perhaps the most politically sensitive issue in today’s Spending Review is the issue of tax credits. In his summer budget the Chancellor announced cuts in this area alongside a shift to a living wage (in name only), which he argued would mean that 9 out of 10 families would be better off. The IFS quite brilliant debunked that, demonstrating that 3 million families would be on average £1000 worse off as a result of the Chancellor’s wage and tax credit changes. Since then pressure has been building on the Chancellor, including from many in his own party, to mitigate the tax credit cuts. The House of Lords intervened dramatically some weeks ago, asking the government to go away and think again about its tax credit proposals, to the consternation of many Conservative MPs. Easing up on the cuts to tax credits means the Chancellor has to do one of three things: ease up on the pace of deficit reduction, find cuts somewhere else to offset the easing of those to tax credits, or raise more revenue. Given last weeks disappointing borrowing figures it will be difficult for the Chancellor to take the first route of the three mentioned.

The prospect of finding offsetting cuts in the Universal Credit budget – and specifically in the taper-rate, which determines how much benefit you lose for each £1 of income you earn once moving into employment – has been scuppered by Iain Duncan Smith. There has been some quiet rumbling about the possibility of reducing housing benefit, which would be a remarkable move as it would hit many of the same people who will be hit by the tax credit changes.

Word this morning is that the package to be announced today by the Chancellor will see a significant reduction in the amount of money that low income working households will lose, compared to what was announced in the summer budget, but that such households will still lose out. That will continue to undermine the government’s narrative of being on the side of ‘hard working families’. Perhaps most importantly, in order to deliver this mitigation effect the Chancellor will seemingly have to breach on his sacred targets, namely the Welfare Cap …

Revising of headline targets. It’s possible that by the time John McDonnell stands up to deliver Labour’s response to the Spending Review, the Chancellor will have announced that he will fail to have a budget surplus by 2019/20 and a breach of his own Welfare Cap. These are two of the Chancellor’s most oft-repeated, and politically salient, targets.

Commentary over the past few days by the OBR and the IFS strongly suggest that the Chancellor is going to have a huge hole – perhaps in the region of £30 billion – in his budget forecasts to the end of this Parliament (2019/20). His forecasts in his summer budget rested on what many believed to be implausibly ambitious growth figures. Given that those growth figures are being revised, and given that the borrowing target for 2015/16 will almost certainly be missed the Chancellor may have to admit that he will not be able to eliminate the deficit and run a £10 billion budget surplus by 2019/20. The IFS director, Paul Johnston remarked this morning on the BBC:

There is a reasonable case to be made for getting into surplus at some point because that increases the rate at which we pay down the debt we have, which is currently around 80% of national income which is quite a high level. But whether he meets that target in 2019 or 2020 or 2021 doesn’t matter terribly much from an economic point of view … From an economic point of view, even if you want to get into surplus and stay there, the speed in which you do it doesn’t matter that much, as much as getting there within some period.

The Chancellor will want desperately to avoid changing his target but it’s hard to see how he does that without further turning the screws on Whitehall departmental spending.

On top of that is the possibility that he will have to breach his Welfare Cap. The Chancellor announced a cap on the overall amount the government can spend on certain welfare payments in the budget of 2014 and has said, of this cap, that: “From now on, any government who want to spend more on welfare will have to be honest with the public—honest about the costs—and secure the approval of Parliament in order to breach the cap.” It would be politically embarrasisng if he had to go to Parliament and request such a vote. The real mistake the Chancellor made is to announce an arbitrary target, but he’s quite fond of those.

Look for the Chancellor to announce a set of measures today that help him bring in more revenue to offset the missed borrowing targets in an effort to keep him on course to meet his overall targets by 2019/20. That might include further privatisations, efforts to raise income from government owned assets such as the land holdings of Transport for London, the Ministry of Defence, and local authorities, and/or raising fuel taxes.

City and city-region devolution. With the devolution of powers to the Greater Manchester Combined Authority well underway, and several other city-region devolution deals already agreed by the Chancellor (Sheffield; West Yorkshire; Cornwall; North East and Tees Valley; West Midlands; Merseyside), watch today’s Spending Review for further announcements. In total 38 devolution ‘bids’ were received by the Treasury before the September deadline. Of those 38 several have already been agreed but most remain to be decided on. If the majority of them are progressed by the Chancellor today then we really are looking at a quiet revolution in the governance of England. The Local Government Association has produced a useful map of the state of play, revealing that England is increasingly becoming ‘covered’ by areas that have either formed combined authorities or have bid for deals from the Treasury. It’s beginning to look like a more comprehensive reform of English local governance than many thought it would be.

Edinburgh. Reflecting on the fact that I write this blog from the City of Edinburgh, where our Academy of Government is based, there is something of local interest in today’s Spending Review. The Edinburgh & South East Scotland City Region (that is six Scottish local authorities combined) submitted a bit in September to the UK Treasury for a City Deal. Such a deal would involve agreement between the local authorities, the Scottish Government, and the UK Treasury to stiumlate investment in the city-region. The submitted bid is worth c. £1 billion, with a further £3 billion sought from private sector investment. Although not as comprehensive as the city and city-region devolution deals that the Chancellor has been striking with places in England (headlined by the ‘Devo Manc’ deal) there is a similar focus on boosting Gross Value Added, improving connectivity and infrastructure, and building new houses. In today’s Spending Review we should find out whether that bid has been successful. Edinburgh is particularly keen to succeed given that the Glasgow and Clyde Valley City Deal was agreed in July 2014.

Rabbits from the hat. Overall this Spending Review isn’t going to be the most comfortable for the Chancellor. He is likely going to have to announce that he will miss his borrowing target for 2015/16 by some way, that he will struggle to hit his £10 billion budget surplus by 2019/20, the the government will breach the welfare cap, and that even with changes to his tax credit plans many working families are still going to have less money in their pockets. So, how do you get around that? You pull rabbits out of the hat. Word this morning is that housing will be a big focus of the Spending Review, with the Chancellor committing to the largest house-building programme in peacetime.

Politics is often about changing the story. Many commentators and most opposition politicians will want today’s story to be about the failure of austerity, the missed targets, and the continuing hits to hard working families. Osborne needs to change the story. Look for him to do that by doubling-down on his devolution and Northern Powerhouse narrative, shifting the attention to house building, and trying to claim that his partial reversal on tax credits represents a government prepared to listen and to occupy the sensible centre ground of British politics.

Will that be enough to make for a successful Spending Review? We’ll know that once the narratives start to set in later today and into tomorrow …

Follow the Spending Review on the Academy twitter account from about 1pm (an exam review lecture will keep me busy until then).

__________

Daniel Kenealy is a Lecturer in Public Policy at the University of Edinburgh.

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