How bad will the cuts be?

Hey, the good news (or not, depending on your point of view) is that public spending is going to rise from £696.8bn this year to £757.5bn in 2015-16. (See Page 45 of the budget report.) This seems to have caused confusion in some areas. A Wall Street Journal commentator expresses some surprise that public spending will rise in real terms and Harry Phibbs at Conservative Home is far from impressed.

But, as Tim Worstall and the Marmalade Sandwich note, when inflation is taken into account these projections mean that public spending will fall. The clue is on page 44 of the budget report where it says:

TME [Total Managed Expenditure] will fall in real terms by 4 per cent over the period.

A 4 per cent cut spread over the life of a parliament. Doesn’t sound too bad does it? Problem is, because we’ve had to borrow so much money, we’ve got an increasing debt interest to pay off. It was around £31bn last year and is predicted to rise to £67bn by 2014-15 (see page 102 of the Budget Report). That eats up all the spending increase and, in real terms, leaves us with some serious cuts.

According to the Institute for Fiscal Studies, Departmental Expenditure Limits will reduce by 14% in real terms by 2014-15. But that’s not the whole story. Ring-fence the NHS and overseas aid you are left with 25% real terms cuts. So, by 2014-15, all other departments will be three-quarters the size they are now.

But even then, that’s still not the whole story. Will a Conservative-led government, fighting a war in Afghanistan, really cut defence spending by a quarter? Of course not. The Chancellor hinted yesterday that defence and education will be spared some of the pain. 

Rowena Crawford of the IFS calculates that, if spending on defence and education is only cut by 10 per cent, other departments would then have to be cut by 33 per cent. Her 10 per cent is probably not far wide of the mark. Politically, it would be difficult for the government to make much bigger cuts to high-profile services which are already under considerable pressure. It is therefore reasonable to assume that, under the current plans, by 2015 every other department will be two-thirds the size it is now.

That’s one hell of a challenge. The much promised efficiency savings will not come anywhere near the 33 per cent reduction needed. Central government services will need to be drastically cut. The grants to local authorities will be severely reduced too. The council tax freeze will prevent them raising any extra cash locally, so services like housing, social services, road maintenance and refuse collection will all suffer. Cutting departmental spending by a third is a reduction on an unprecedented scale. As the Independent’s Steve Richards concluded yesterday, “Parts of the state will almost disappear.”

And what of the NHS? Has the health service got off scot-free? Probably not. So far, no-one has said what ‘protecting the NHS’ actually means. The IFS assumes that this means spending increases in line with inflation, in other words, a real-terms freeze. But spending on the NHS has risen at something like 7% per year in real-terms over the last decade. Pressure on the NHS grows every year as people live longer and demand the ever more sophisticated treatments that become available. Last year the Kings Fund estimated that the NHS needs a real-terms increase of 1.2 per cent per year just to stand still. The recession will bring added pressure. The people who used to pay for private healthcare will turn to the NHS for treatment. Recession-related illnesses brought about by increased poverty and stress will also add to the load. NHS bosses might not be facing a 33 per cent cut but they will still have to do a lot more with a lot less money.

So how will all this be achieved? Is there anyone in the public sector who knows how to reduce spending by a third over four years? Come to think of it, I don’t know of many organisations anywhere that have cut costs on that scale over such a short period. Most managers in the public sector have only ever known year on year real-terms funding increases and have little or no experience of such drastic downsizing. They will have to learn fast.

As demand for public services rises, as it always does during recessions, budgets will be cut, headcounts will be slashed and morale will fall though the floor. Some managers will be running cost reduction exercises that end with them issuing their own P.45s. This will be a stretch even for the most competent executives.

Will it happen? Michael Portillo doesn’t think so. He reckons the government will end up having to raise more in tax when it discovers that its public spending cuts are unachievable.

We shall see. Whatever happens, the public sector will still be in for some hefty cuts, as it would have been under Labour’s plans. Even if it’s not 33 per cent it’s still going to be tough. Expect to see the GPs’ surgeries filling up with stressed out public sector managers.

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1 Response to How bad will the cuts be?

  1. Pingback: How bad will the cuts be? - Rick - HR Space

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