Back in 2010, it was expected that the deficit would be cleared in time for the 2015 election. Instead, growth disappointed, and whilst progress was made, the job of repairing the public finances was left incomplete.
Now, the current Conservative government is planning further public spending cuts to eliminate borrowing by 2018-19. This paper sets out the scale of the challenge ahead and what this means for how government should make the important tax and spending decisions needed to deliver on its commitments. Unless otherwise stated, all figures in this paper are in real terms, in 2015-16 prices.
The paper looks at two questions:
- What does the deficit reduction programme need to achieve? What are the important factors that must underpin the government’s consolidation plan?
- Making better decisions: How should government undertake its next Spending Review to ensure these objectives are met?
The paper finds:
- Growth must be a top priority running through the government’s entire policy programme.
- Government needs to be able to map out and identify areas of growth-friendly spending across government budgets. Activities that are growth-enhancing need to be prioritised as part of any Spending Review.
- Government must also maintain a growth-friendly tax system.
- Distribution and fairness of spending decisions will continue to be important, if not more so, in this Parliament compared to the last.
- All parts of the public finances should be scrutinised for the potential to make savings.
- Tax expenditures need to be considered alongside explicit spending.
- Government has already committed to protecting a number of budgets, and increasing spending on certain areas. However, it must ensure that beyond this, it allows itself as much flexibility as possible in how these budgets are spent.
- Even within ring-fenced budgets, government must focus on whether budgets can be spent in a way that improves outcomes.
- The scale of the challenge ahead will increase the imperative to look at how services are delivered, and where reform needs to be undertaken. The Spending Review process will need to allow time for these types of reforms to be developed.
- The government should conduct a fast “Efficiency Review” that identifies around a half of the savings required. This review should report on savings by the Autumn Spending Review 2015 at the latest.
- In tandem it should launch a longer-running “Reforms Review” that allows for the more in-depth analysis required to develop successful, wider reforms, and identify the remainder of the savings. The Review should be completed by Budget 2016.
- The government should re-run the Spending Challenge, this time with incentives for entrepreneurs and small businesses to submit money-saving ideas.
- A Spending Review Committee should be set up to scrutinise the Review process.