This is a tough budget. It adds another £40bn to the already stringent consolidation planned by Labour. We won’t know its full impact for some time to come. The real test will be what happens to the economy and to jobs. If growth continues and gathers pace next year, then the Government will feel vindicated, if not then people will question whether the scale and timing of deficit reduction was right.
At least now we know the numbers – what we don’t yet know is what will be the impact on public services. That will be set out in the spending review, which now assumes even greater importance given the challenge of trying to maintain and even improve social outcomes in the context of huge spending cuts.
A large part of the story is about welfare cuts. Child benefit will be frozen for the next three years and all other benefits, except pensions, will be uprated only in line with the Consumer Price Index, rather than with RPI. Housing benefit will be capped at £400 a week.. The principles which are being applied to welfare cuts are conditionality and means testing, with the aim being to target expenditure on those who need it the most and to incentivise work. But this clearly does not explain the decision to uprate the state pension, which is a political decision.
By far the biggest inconsistency in the coalition government’s position on public expenditure is on health. The government’s argument is that we face a moment of unprecedented fiscal crisis and so everyone will have to share in the pain of cuts. In so far as there is a glimmer of hope at the end of the tunnel, it lies in the belief that a crisis can be an opportunity to reform public services to get more for less. Both these considerations ought to apply to health, it bears a huge share of public expenditure and no service area better represents the concentrated power of institutional and vested interest than the NHS. Either public services need to be reformed or they don’t. It makes no sense to exclude the most expensive service of all from this process. The exemption risks undermining reform elsewhere as well as forcing other spending areas to shoulder a disproportionate level of cuts.
It is a measure of just how big the other departmental cuts are that what looked a savage reduction in capital spending under Labour now looks likes an infrastructure reprieve under the new government – even though this still corresponds to a 17% cut in building projects. The previous Budget’s projection of 10% cuts in non-ring fenced department spending now looks like the good old days, when compared with the 25% cuts which these departments will now face.
What the Budget lacked, and the Spending Review will have to provide, is a coherent public service reform narrative and strategy. This points to a dissonance at the heart of the Coalition Government. Whilst the Prime Minister has proclaimed the Big Society as the Government’s big idea, this is not mentioned anywhere in the 120 pages of the Budget statement. Yet, if the Big Society is to have substance then surely it must be relevant to the fiscal challenge, otherwise it is just a nice to have decorative adornment to the age of austerity.
The spending review will need to develop a strategy for public service reform and transformation and not just for expenditure cuts. The challenge is even greater than that faced by countries like Canada, because the scale of potential cuts is greater and the expected level of economic growth is lower. The question will be how can cuts on this scale be delivered without unsustainable public sector job losses, particularly in the north? And how can communities and neighbourhoods prosper and develop greater autonomy, when the support they will need to enable this will be under pressure as never before. The spending review will need to put the emphasis on structural and institutional reforms and on building social productivity – focussing on neighbourhoods, service integration at local level, more for less budgets for local areas and the social finance mechanisms which can enable scarce funding to be reprioritised on prevention and early intervention. Without this, retrenchment will quickly turn into residualisation.