Peter Riddell: George Osborne has eased the spending squeeze – but there’s more to come in the autumn

The Institute for Government director dissects the summer Budget and finds the toughest news is still to come for Whitehall

By Sir Peter Riddell

14 Jul 2015

The post-election summer Budget was only half the story for the civil service – with the other half coming in the autumn with the Spending Review. But the half that was unveiled by George Osborne on July 8 was painful enough for civil servants, both personally – facing another four years of very tight pay increases – and in their departmental roles, in view of the further spending cuts. The implications are that the budgets for many less favoured or unprotected departments will be cut sharply over the course of the parliament. 

While the outward face of central government has been left largely unchanged since the general election, there will have to be further substantial changes in the way that the state operates and delivers services. How that is achieved is still largely unknown. As Sir Jeremy Heywood said in his post-election blog, “months of detailed work are now needed to set each department’s budget”. 

The sharp squeeze announced by Mr Osborne in the pre-election March Budget – what the Office for Budget Responsibility described as the rollercoaster ride – has been eased slightly, and the date of expected Budget balance has been pushed back a year to 2019-20. This smooths the path of projected spending cuts. The squeeze will not be as tight in any single year as it was in the first two years of the last parliament, partly because of the identification of £12bn in savings from the welfare budget. Overall, however, while the trajectory of cuts may be less steep, the planned total cutbacks over five years – of £20bn – are still very large. 

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There is a sharp distinction between protected and unprotected departments. Total departmental spending is set to decline by 3.2% in real terms between 2015-16 and 2019-20, according to the Institute for Fiscal Studies’ assessment. However, the government has pledged an extra £8bn for the NHS by the end of the decade, on top of the £2bn more announced last autumn. There are also the reaffirmed pledges to maintain international development spending at 0.7% of national income and cash spending per pupil in schools.

Mr Osborne made a new pledge to increase the entire Ministry of Defence budget by 0.5% a year in real terms. In addition, an further £1.5bn a year by 2020 will go to increasing spending on the military and intelligence agencies by an average of 1% a year in real terms. The government has also promised extra spending for childcare and social care, while there will also be higher bills for national insurance and pension contributions for public sector workers. 

Departmental budgets – excluding the NHS, International Development, schools and Defence – are scheduled to decline by around £19bn between 2015-16 and 2019-20, according to the IFS. This amounts to a 12.6% real terms cut over the period. Over the whole nine years from 2015-16 until 2019-20, these unprotected departments will see their budgets fall by nearly a third in real terms. That puts the focus on BIS, the Home Office, Justice and Transport, as well as a number of smaller departments.  

The detailed distribution will be the subject of intense negotiations over the next few months. The Budget said the government “will continue to pursue more efficient ways of working and further reform to public services”. The Cabinet Office is going to work with the Treasury to explore a number of cross-cutting savings proposals. 

Two likely results will be a renewed drive to achieve savings through a shift to the digital provision of more public services – though the gains are still largely unproven here – and by a fresh squeeze on arm’s length bodies. 

The other key change, affecting civil servants directly, is the announcement that public sector workforces will be funded for a pay award of 1% a year for four years from 2016-17. This, according to Sir Jeremy, will be applied in a targeted manner within workforces to support the delivery of public services. 

Departmental budgets will be set to allow pay for civil servants to rise by an average of 1% each year in cash terms. That allows for some variations, though not much, in individual pay rises. While inflation is currently tiny, the rate is likely to rise above 1% over the rest of the decade, implying a decline in pay in real terms, as there has been for the past few years. 

Sir Jeremy has been careful to say that there is no planned target for reductions in civil service numbers and it will be up to departments to decide where savings will come from. There will be tricky trade-offs. But the indicated shift in relative pay between the public and private sectors may reduce the attractiveness of working in the civil service, affecting both recruitment and retention. And the really tough news for the civil service will come in the autumn. 

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