Spending review: the state isn’t getting smaller

After the general election, the Queen’s speech and the Summer Budget, ministers may have been looking forward to the end of the parliamentary term. Then, on the very last day before recess, the Chancellor set them work for the holidays: the spending review. The Treasury expects to see proposals from every non-protected department to cut costs by between 25 per cent and 40 per cent. Departments have all of August to come up with them, before “initial ministerial discussions” in September.

But there is some relief for them. The Chancellor continues to moderate his plans for spending cuts little by little. In the Summer Budget, he pushed back the target date for achieving a surplus by one year. He also tweaked taxes up a little. Now, in the document launching the spending review, he has made clear that, in the first year for which spending plans have still to be settled—2016/17—£3bn of cuts are needed. This is a low start, before the requirement rises to £11bn in the second year of the spending review period and £20bn by the end of it. At the least, this means Departments have a bit more time to implement a change in “the shape of the state”—as the Treasury’s document puts it—and realise the larger chunk of the savings needed from them.

What ministers are lacking for their summer assignment is a clearer sense of what new shape the Chancellor has in mind. The document says remarkably little about the principles that might guide reform. Instead there is a breezy confidence about the feasibility of making further cuts. As the foreword puts it, “we know we can achieve this... because we have done it before.” That isn’t entirely convincing for two reasons. First, the second half of a decade of austerity inevitably poses harder choices than the first; and second, the government did actually have a strong set of hypotheses in the first half about how it would save money. It focused on outsourcing, holding down pay in the public sector, reforming public sector pensions, and aggregating procurement spending to achieve economies of scale, and moving services online. There is no broad set of similar theories about how to save money this time.

The theories that are offered have little evidence to back them up. Devolution of power to local decision-makers, it is hinted, may help to realise savings. That is plausible. But the Treasury’s spending review document doesn’t give departments any precedents to learn from. Equally, the document repeats several times that new technology and innovation creates the potential for savings. Perhaps it does. If the Treasury has specific ideas though, it’s keeping them secret for now.

There are perhaps some further clues in the summer budget. The Chancellor has already announced two major reforms in the spending plans of the Department for Business, Innovation and Skills: money for university students to meet the costs of living will be provided in the form of loans rather than grants, and there will be a new levy on large employers to pay for apprenticeship training. Subject to details, these changes will achieve a large part of the savings expected from this one department. Sajid Javid, the Business Secretary, will have an easier summer than some of his colleagues.

But what we learn from these changes is quite surprising. The state isn’t getting smaller, in fact it’s doing more—the cash amount available for students to live on while studying is going up and apprenticeship numbers are rising to three million over this parliament. This expanded level of activity is being paid for differently, however. Graduates will contribute more through income-contingent loan repayments that look a lot like a tax and employers will pay more towards skills training. While the Chancellor pledges solemnly to cut general taxation, such as income and corporation tax, he is raising more money for the state through specific tax-like charges. The theory seems to be that, if we know precisely what our money is being used for by the state, then we will feel okay about paying up.

This logic could apply in other areas too. Though so far there is little consistency in the Chancellor’s approach. The budget also promised, for example, to freeze rail fares. Yet this is an obvious area where the contribution from general taxation to the cost of rail services could be reduced and more raised through specific contributions by users. Could more local services become billable through the spending review? Are there other costs that the state might move on to businesses?

For the moment, I doubt that the Chancellor has made up his mind. Or even started considering the options. He has until November to decide. Ministers though only have a few weeks to come up with their opening offers.