Opinion: Peter Riddell, IfG

The next government will face difficult choices over cuts – and it won’t find the answers in a traditional spending review

By Sir Peter Riddell

13 Feb 2015

Whoever forms a government in May, their most pressing domestic priority will be deciding public spending plans for the rest of the decade. There are big choices not just over the spending profile and scale of cuts but, moreover, what this means for changing the way services are delivered by both central and local government. A traditional spending review – based on percentage cuts in all but some protected programmes – is no longer the answer. 

Most civil servants recognise this, as do many senior politicians. But you would not think so from the way the pre-election campaign has started in the New Year. For a veteran of 10 general elections, there is a depressing familiarity to the barrages and counter-barrages of claims. Treasury costings of opposition policies have been called in aid by ministers, even though some of the assumptions are based on casual remarks rather than firm commitments. Labour did exactly the same five years ago, and so has each party for three decades. But civil servants should not be asked to participate in such exercises.

As Institute for Government research has pointed out, other countries – notably Ireland, Australia and the Netherlands – have better mechanisms for costing party policies. For instance, the Central Planning Bureau in the Netherlands not only calculates the costs and short-term budget impact of planned policies but also assesses party manifestoes against a range of indicators, including forecast impact on debt sustainability, economic growth, employment, income distribution and environmental measures. The CPB publishes a detailed analysis of party manifestos about a month before polling day. The Office for Budget Responsibility now exists in the UK to conduct such exercises, but the government has so far resisted extending its remit in this way – a priority for any post-election review.

Pushing to one side the dodgy dossiers of the pre-election battle, two points are clear about the parties’ plans. First, the three main national parties want to reduce borrowing over the course of the next parliament. Second, the differences in their targets imply big contrasts in the scale of spending cuts required in this period. The Conservatives have so far promised to achieve an overall budget surplus in the next parliament. 

The most recent OBR forecasts suggest that a surplus would be met in 2018-19, with debt at last starting to fall as a share of national income from 2016-17. Labour has promised to achieve a surplus on the current budget, ignoring investment, and a fall in national debt in the next parliament. The distinction between the current and the overall budget as a target could be substantial and, according to the Institute for Fiscal Studies, allow a Labour government to run a significantly looser fiscal policy than implied by the coalition’s forecasts. The Liberal Democrats have taken a broadly similar view. There are big uncertainties over definitions of investment and the timing of eliminating either the overall or the current budget deficit. The IFS has suggested that there could be a £25-26 billion difference between Conservative and Labour/Liberal Democrat plans, in current prices, by the end of the parliament. 

Nonetheless, even to meet the looser Labour and Liberal Democrat fiscal targets will require tough spending decisions. The choices will be even harder than in 2010. That review followed a long period of sustained increases in spending, so a lot could be squeezed out through cutting administrative costs, notably by big reductions in staff numbers, and squeezing pay and pensions. The impact on provision of services has so far been less than some feared in 2010, though obviously with big exceptions in social services and criminal justice. But the options are now much narrower, notably in the NHS and local government.

A standard spending review looking for all-round cuts will not work without damaging services the public wants. Further savings will require more innovative and cross-departmental approaches. This, in turn, will need more time for collaboration between departments and to consider evidence from the What Works Centres and the Major Projects Authority. In particular, more time is necessary to avoid a repetition of the hurried and muddled Strategic Defence and Security Review of 2010. Decentralisation also needs to be taken seriously, with genuine transfers of power to local authorities and agencies. A successful review will also require a big move forward in digitalising the delivery of services: a start has been made in the current parliament but much more can be – and needs to be – done over the next few years, as Mike Bracken, the head of the Government Digital Service, would be the first to argue.

There are big challenges for both the civil service and politicians. The civil service needs to use the next few months to prepare a wide range of options for the next government. Current ministers need to give the civil service the political backing to do such preparatory work. And politicians generally should avoid unrealistic spending and tax pledges ahead of the election and, after polling day, should allow plenty of time to consider spending decisions.  


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