FDA chief Dave Penman: George Osborne's budgetary sleights of hand will cost the public sector billions

George Osborne’s third budget in 12 months will force departments to find the lion’s share of “easy” savings through barely-mentioned pensions changes hidden in the small print

By anyone’s measure, three Budgets plus a Spending Review within 12 months does feel like a bit of overkill. I know the chancellor has greater personal ambitions, but even he must be getting sick of the sound of his own anecdotes. There’s only so many times you can tell everyone you took the difficult decisions and didn’t seek short-term fixes before you start to sound like a broken hip hop record from George’s fave band NWA (improbable as that may seem, but this is what he told the Daily Mail).

We’ve gone through an emotional rollercoaster with the chancellor over the past year. Dire predictions in his pre-election Budget, a softening of tone in June in his emergency Budget and then a muted but audible sigh of relief at the Autumn Statement, when the collective view was that it wasn’t quite as bad as we were expecting.

Now, barely three months later, the storm clouds have gathered. Growth forecasts are down and delivering the surplus he wants has just got a whole lot harder. There’s a lovely quote that comes to mind when I’m listening to the chancellor roll off the latest statistics. It’s from an economics adviser to a number of American presidents, John Kenneth Galbraith: “The only function of economic forecasting is to make astrology look respectable.”

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The problem for the chancellor is not that economic forecasting is a tough job and subject to many variables beyond his control; it’s that if you’re going to laud your own success by these predictions then you’ve got to take a bit of a hit when they don’t go your way. 

And they’re certainly not going his way. Having invested a lot of political capital on delivering a surplus, when the numbers don’t add up he has to shift his position or find some cash from somewhere. After ruling out general tax rises as politically untenable, this can only leave greater cuts to public spending.

So three months after setting out his spending plans, we’ve got the announcement of a further efficiency drive to save £3.5bn in the year 2019-20. A mere bagatelle apparently; it’s less than half a percent of government spending, who’ll notice? “More than achievable,” said the chancellor in his speech. 

'Smoke and mirrors' is the expression we used to describe the Budget: billions siphoned out of public spending plans in a throwaway comment in the chancellor’s speech. 

Well it better be, because that’s not all departments face in the crucial 2019-20 year when Osborne has his sights set on a Budget surplus. He also slipped in an announcement on a change to the Discount Rate that applies to public sector pensions. I spent 20 minutes trying unsuccessfully to explain this to a journalist on the day, so strap in and pay attention.

If you ignore that there was no consultation on this – we’re just getting used to that as the government’s default position – the discount rate is a major part of how the government measures the cost of public sector pensions. In some ways it’s a proxy for investment returns that would exist if public sector pension contributions were invested. So if the discount rate is higher, less money is needed to fund the scheme: if it drops, as is now the case, more money is needed. Now remember, there is no actual fund. The Treasury receives all the employer and employee contributions to the unfunded public sector pension schemes and the government promises to pay out the appropriate benefits.

By reducing the discount rate, the Treasury has increased the cost of these schemes, leading to increased contributions being required from public sector employers from the now-mythical 2019-20 year, by shifting £2bn back into the Treasury’s coffers. Now this is where I lost my friend from the fourth estate. This isn’t real money. The Treasury funds those employers, so really it just means public sector employers like government departments and hospital trusts will have £2bn less in that year. Just as well that £3.5bn was “more than achievable”, isn’t it?

The same trick is being performed this month. Employer National Insurance (NI) is rising by more than 3% as a result of the changes to contracted-out NI arrangements and introduction of the single state pension. There was no compensation to public sector employers for this, so it’s basically a further cut, equivalent to 3% of salary costs, from their budget. To put that in context, the latest NAO figures estimate the annual salary costs of the civil service at around £11bn, so that’s around £330m (if my ‘O’ Level maths is correct) being drawn back to the Treasury from departmental spending.

“Smoke and mirrors” is the expression we used to describe the Budget: billions siphoned out of public spending plans in a throwaway comment in the chancellor’s speech. 

I did my own bit of forecasting last month when I wrote scornfully about the lack of depth to the Single Departmental Plans. I suggested the chancellor might start salami-slicing departments again and the lack of detail in the plans meant there could be no meaningful analysis of how the government will manage priorities. And so it came to pass. I don’t know what Galbraith was going on about, this soothsaying lark is easy.

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