The Spending Review’s big choice: will there be five ‘big losers’ or a toning down of the cuts?

Published on Fiscal Choices

The core of next week’s Spending Review is now becoming clear. If the Treasury delivers the pre-announced scale of cuts we will see five ‘big losers’ in Whitehall including, surprisingly for some, Education.

The Chancellor is now five days away from announcing his second multi-year spending review. Since 1998 these departmental budget setting exercises have provided a rare moment to step back from day to day politics to assess where a government is taking the country over a parliament.

The combination of manifesto promises, the Summer Budget and innovative twitter-announced departmental settlements of recent weeks, has given us a fairly good idea what the day to day budgets of over half of government departments will be. So we can put together an illustration of what the overall Spending Review outcome could be. This is a useful exercise for focusing on the big picture choices that remain rather than the individual percentage point cuts. And crucially the scenario we set out is based on the Treasury sticking exactly to the spending totals from the Summer Budget – an outcome which is far from certain. It also focuses solely on resource spending, while for some departments like Transport what really matters next Wednesday is their capital allocation.

In the illustrative spending review below we divide the departments into four groups: those that are ‘protected’, the devolved nations, those that have already settled, and the remainder.

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On the protected departments, the key is that the share of total spend that is protected is significantly greater than in the Chancellor’s previous Spending Review, or the 2013 Spending Round. This is both because more departments have been protected (the Defence budget will rise not fall this time) and because five years of cuts to unprotected departments have already made them a smaller part of the overall pie. The impact of this protection is to triple the scale of the cuts facing unprotected areas, compared to a world in which the cuts are spread across all departments.

The key unknown within the protected budgets is the exact settlement for health spending: not how much (given that the government has committed to £8 billion extra by 2020-21) but when. With many trusts facing big deficits this year it will be a test of Simon Stevens’ negotiating skills to see how much of that spend will be front loaded into the next few years.

The grants to Scotland, Wales and Northern Ireland also represent a very large chunk of spending that can’t be directly cut. Instead those budgets will be a function of other (mainly English) spending. Because that includes the English NHS boost, the average cut to these devolved budgets is relatively small. So we won’t be looking here for big billion pound savings next week. But we will be looking for any changes to how the Barnett formula will operate, given additional fiscal devolution and the introduction of a new ‘funding floor’ for Wales.

On the unprotected side, seven mid-size departments have already settled their resource budgets (plus some smaller bodies and the tiny Scotland/Wales/NI Offices), with an average cut of 24 per cent. That compares to a planned cut to unprotected budgets as a whole of 28 per cent. It’s also below the bottom end of the cuts of 25 per cent and 40 per cent that departments were asked to draw up plans for.

Tough settlements no doubt – particularly as they come on top of the significant cuts delivered in the last parliament – but these departments might just consider themselves to be the lucky ones.

Most importantly HMRC and DWP, the two settled departments with budgets over £3 billion, are part of an average cut of just 21 per cent. For them, the real unknown for Wednesday is now whether there will be fudge or a welcome reversal on tax credits, and what other welfare and tax changes might be planned.

Of course, if the overall savings target remains unchanged and is to be met, the below-average cuts agreed by these seven departments have obvious repercussions for those yet to settle. Indeed the cash value of the cuts announced so far (in the region of £4-5 billion) does not even cover the boost to NHS England (an estimated £6.4 billion by 2019-20). That is to say they are about changing the shape of the state (more health, less everything else) rather than shrinking it.

All of which means the remaining departments left to settle must deliver in the region of £18 billion of savings. In practice, just five can make a meaningful contribution to that total, as shown in the to-scale graphic below. These ‘big losers’ are Business, the Home Office, Justice, local government and non-schools education.

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Given what we now know about all the other departments these ‘big losers’ could face average cuts of 30 per cent, if the scale of spending cuts outlined by the Treasury is to be delivered. It’s perhaps not a surprise then that negotiations with these departments are taking longer to finalise.

It is worth pausing on the inclusion of Education in this list. It makes it on because its protection only applies to the 5-16 schools spending, leaving sixth forms, the care system, teacher training, under 5s and even some elements of 5-16 schooling like the Pupil Premium and Free School Meals. Indeed, in the unlikely world in which all the ‘big losers’ were to undergo the same proportionate cuts, Education would actually record the biggest cash cut of all at around £4 billion.

So the conclusion of the various pre-announced policies is that it’s these five departments that we should focus on next Wednesday (assuming we don’t get more details being tweeted in the coming days). Either they will have received an average cut of around 30 per cent, or the overall pace of cuts will have been watered down.

Such a watering down is still a possibility as, unlike previous spending reviews, overall DEL spending (what’s called the ‘spending envelope’) has not been firmly set in advance. Indeed the Summer Budget was unusual in specifically leaving leeway for the fact that it could change. That might be to reflect a changed economic or fiscal forecast, to allow borrowing to take more of the strain or because of further tax rises or benefit cuts.

Next Wednesday we’ll find out if any of those routes appealed to the Chancellor, or if the ‘big losers’ are just that.