The Autumn Statement has brought news of yet more public sector cuts. In a repeat performance of last year, the chancellor has pencilled in more spending reductions to come after 2014-15. This is to ensure that the Office for Budget Responsiblity assesses that he remains on track.
The cuts announced in the Autumn Statement involve extending the annual reduction in current spending in the first two years of the next parliament for an extra year, to 2017-18. In particular, the chancellor outlined explicit cuts to welfare expenditure of around £5 billion in annual spending in 2017-18.
That figure has already made a few headlines. But what’s clear from the budget document is that this is just the tip of the iceberg. The real impact of the extra fiscal pain outlined by George Osborne (and in last year’s Autumn Statement) looks set to fall hard on public services.
While we know what cuts are planned out for 2014-15, where the axe will fall in the next parliament hasn’t yet been spelt out. But the broad implications of the figures are clear. The chancellor has set out a total spending envelope that has current spending – on benefits and public services – falling
between 2014-15 and 2017-18.
But even with the cuts announced to welfare spending, the welfare bill is set to go on rising above the rate of inflation, due to things like an ageing population claiming their pensions, and rising rental costs driving up housing benefit.
To stay within the spending plans set out, the implications for departmental spending are dire. Public services will have to be cut even harder to accommodate the rising welfare bill. Now, with an extra year of austerity, departmental spending will see a cut of just over £31 billion between 2014 and 2018.
As we set out in our recent publication, Fiscal Fallout, the impact on many departments will be huge. A reduction of £31 billion means an average real terms cut of just under 9% for all departments between 2014-15 and 2017-18.
If the government wanted to protect health, education and international development spending, as it broadly did in the last spending review, other departments would have to reduce spending by just under 19% over the three years.
That devastating round of cuts will come on top of an unprecedented squeeze in the preceding four years. In total, between 2010 and 2018, some departments such as the Home Office and Ministry of Justice could shrink by almost a third if the spending reductions are evenly spread, or almost 40% if some departments are protected.
There are many stories that come out of the Autumn Statement. But the one that people will ultimately feel most keenly – a further big cutback to public services – is buried deep in the numbers. When all the commentary about targets and rules is over, that will be the tough reality that the next government will have to face.