Despite five years of spending cuts, the Government deficit is yet to be eliminated.
The Chancellor’s Autumn Statement in December 2014 implied that overall departmental spending will fall in real terms by about 14% after 2015-16. Because investment is set to increase, day-to-day departmental spending is expected to fall by 17%. If these plans are followed through by the next Government, the cut to current (or day-to-day) departmental spending (including spending on public services) will amount to a real-terms cut of over 25% over the 10 year period since 2010.
There are still some uncertainties. Whilst spending allocations for 2015-16 are largely fixed, we do not yet know exactly where each party would make the savings required beyond this date. Raising taxes or reducing welfare would mean that departmental spending could be cut by much less. And all the three main parties have some room to ease up on the cuts outlined in the Autumn Statement and still meet their respective deficit reduction targets, as set out in A Deficit of Growth II.
Yet, there are a number of areas where the main parties are already making spending commitments. Added to this, there are some areas, such as state pensions and international aid, where spending is actually expected to grow in real terms. This makes the process of finding sufficient savings even harder.
In this paper, we look at:
- where spending commitments have already been made;
- the effect of these commitments on other budgets;
- the purpose of protecting specific spending areas from cuts;
- how spending commitments in the 2010 Parliament have led to inconsistencies and distortions in decision-making.
The size of the protected budgets has meant that non-protected areas have had to take on severe cuts since 2010 and this looks set to continue in the next Parliament. We conclude that there is a strong rationale to avoid protecting specific budgets ahead of a full Spending Review. Doing so means that opportunities for efficiency and improvements are missed and future decisions are constrained. Government spending decisions need to be based on the outcomes that it wants to achieve and needs to take into account inter-linkages between different spending areas. It is inevitable that certain services and outcomes will need to be prioritised over others, but the next Government must clearly articulate the rationale underpinning these decisions.
All prices in this briefing are in 2014-15 terms.