Britain needs a broader debate over cuts

By Paul Johnson

The country faces hard choices over public spending– on whether to continue with ring fences, says Paul Johnson

Spending review announcements are due in just over a month’s time on June 26 and news reports suggest that ministers are finding it hard to reach agreement.

That is perhaps not surprising because they have been asked to identify substantial cuts for 2015-16 while their departments are still focused on delivering the unprecedented spending reductions announced in the last review in 2010. This extra year was always going to be tough.

Under expected plans, a range of departments – local government, justice, environment, Home Office – will have been cut by 30 per cent between 2009-10 and 2015-16. Those are big reductions by any standards.

One reason for the scale of these particular cuts is that some elements of public spending are not being cut at all. Indeed spending on pensions, for example, continues to rise. It is a matter of simple arithmetic to see that if you continue to protect some areas while cutting others then the protected elements will come to account for a greater and greater portion of the total. And continuing to protect them becomes more and more costly, especially when the budgets that are protected are as big as the health and pensions budgets. These are, after all, easily the two biggest chunks of public spending.

Even so, it is worth reflecting on the fact that, thus far, spending reductions have been delivered pretty successfully. Even in the face of ambitious plans there has been over-delivery on a number of fronts. The public-sector workforce has fallen by more than 300,000 – further and faster than originally planned. The chancellor of the exchequer has also been able to announce underspending by departments each year, with a reported £11bn in underspends in the last financial year. It was this that has allowed him to claim, just, that borrowing had not risen.

This success in reining in spending has left some in the Treasury feeling quite bullish about their ability to deliver more cuts.

But as the reported row suggests, ministers managing big departments may not be feeling so confident. The three years of cuts so far may turn out to have been the easy bit. Even by the end of this year, only about half of the total planned fiscal consolidation will have been implemented. And if, as Budget figures imply, the post-election pain is felt largely by public service spending, then much less than half of the spending cuts will be in place.

In fact, this spending review is really just the phoney war. Much bigger cuts are pencilled in for the two years beyond 2015-16. If it were not for the inconvenience of an election in 2015 we would not be debating the choices for one year only. We might actually be having a serious debate about some of the real long-term choices we need to make.

One of those choices is clearly about whether to continue with the ring fences around health, pensioner benefits and schools. A more fundamental one is about whether all the remaining consolidation will really be done through spending cuts. There may not be any pre-election promises to increase taxes. But taxes do have a curious and well documented tendency to rise in the year after an election.

Underlying that choice will be one about the appropriate size of the state. There is a reason for focusing on public spending. Because national income has taken such a bashing, public spending this year will, at 44 per cent, be higher as a proportion of national income than in any pre-recession year since the mid-1980s. Even in plans as set out, it will still in 2018 take up the same share of national income as it did in 2003-04, halfway through the last government’s second term.

That is an important point to grasp. The cuts being faced across the public services are real and they are deep. Yet they will serve only to return the size of the state to something like its long-run average. They are doing something else as well though. They are changing the shape of the state.

The choices that are being made mean that while the public sector will take the same share of national income in 2018 as it did a decade and a half earlier, it will be much more focused on health and pensions – and of course debt interest.

With choices this hard and this big, robust debate is inevitable. That debate should not be confined to Whitehall.

Copyright The Financial Times Limited 2013.