Forget horse-trading over cuts: The Spending Review is an opportunity to rethink the state

Ryan Bourne
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George Osborne needs to protect essential areas while working towards getting public finances under control (Source: Getty)
How large were cuts to government spending during the last parliament? The answer may surprise you. Overall real expenditure fell by just 2.9 per cent between 2010-11 and 2014-15. Later in the month, when the chancellor delivers his Spending Review to flesh out where the axe will fall to meet this parliament’s spending targets, it’s worth remembering this.
Of course, this top line conceals as much information as it provides. For starters, the UK population has grown since 2010. Adjusting for that, real spending per head fell by 5.5 per cent. An ageing population also leads to higher demands on the state pension and healthcare services. But the headline figure reminds us that, for a given spending envelope, governments choose where to allocate resources. While we can debate what overall government spending should be, the 30 per cent budget cuts that some departments will make this parliament (as announced yesterday) are a direct consequence of other areas being spared.
Across the last parliament, we saw two “Comprehensive Spending Reviews”. Except they were anything but comprehensive. The coalition decided to ring-fence NHS and schools spending, to increase international aid, and to implement the extraordinarily generous state pension triple-lock. The end result was that real spending on “health” rose 4.5 per cent; “international services” by 26 per cent; and the huge “social protection” budget (which includes pensions) by 4.4 per cent.
These three areas plus debt interest now represent 59 per cent of government spending. Shielding them inevitably means huge cuts in other areas. “Housing and community amenities” saw real cuts of 22.3 per cent, “transport” 11 per cent, and “public order and safety” 15.4 per cent, for example. It may be that there was much fat to trim in these areas. But continuing on this path, as the government seems intent on (indeed, it will now go further by ring-fencing defence too), will fundamentally alter what the British state looks like. Whether the Prime Minister and chancellor have thought this through from first principles is unclear.
To put it differently: is ring-fencing large areas and then salami-slicing departments through political horse-trading really the best way to cut spending? A more economically sensible approach to achieve the same objective would be to instead adopt the following six principles.
First, undertake a zero-based review of all government activity based on the “functions” of government (rather than departments) and assess all programmes – deciding what it is essential, desirable, and unnecessary for government to do. Eliminate the latter, and decide how departments can be reconfigured to deliver the former most efficiently. Second, for areas where government spending is desirable, prioritise growth-enhancing expenditure. For capital projects in particular, this means choosing those with the highest return. Third, make reforms now which help alleviate the pressures of an ageing population on health and pensions spending. This will not save money straight away, but will vastly improve the long-term debt-to-GDP outlook, which is what matters most.
Fourth, do not institute any ring-fences or “as a percentage of GDP” targets for spending areas such as defence or foreign aid. Spending should be according to need, and should not arbitrarily fluctuate according to the broader health of the economy. Fifth, for essential or desirable areas, undertake audits of what workers constitute “the front line”. Given limited budgets, this may mean ensuring pay restraint is delivered to protect the number of these staff. Finally, in areas where it is still believed spending needs protection or increasing, ensure it is genuinely protected. That means controlling for demand and price changes in those sectors.
This approach would provide an opportunity to really re-think what government does in the UK, protecting essential areas while working towards getting the public finances under control.

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