As the Government works on its plans to cut spending over the next four years, it may be helpful to understand the overall plan. As ‘Simply UK: A Summary Guide to UK Government Finances 2015/16’ illustrates vividly, the Chancellor’s plan to eliminate the deficit comprises three main components once inflation and population growth are taken account of:
- Increase tax revenues by £51 billion a year through growth in the economy;
- Increase tax revenues on top of that by £16 billion a year through tax rises and cracking down on tax avoidance; and
- Reduce spending by £16 billion.
Reducing spending by £16 billion out of a total annual spend of £742 billion doesn’t sound too difficult in theory – after all that’s only 2% of the total. However, once you factor in a £16 billion for higher interest costs because of interest rate rises and £3 billion in additional spending from commitments to protect pensions, health, defence and international development, that means the total cuts needed of £35 billion will be closer to a 5% reduction.
But that’s 5% of the total. Once you exclude protected areas, the impact on individual areas is much more significant. Welfare cuts of £12 billion translate into a reduction of around 10% to the current welfare budget of £121 billion, while cuts to unprotected departmental spending of over £20 billion a year will mean cuts of between 25% and 40% in some areas. These including policing, the courts, prisons and emergency services, local services, social care, further and higher education, transport and housing.
And even in the protected departments, there will be a need for savings. Schools spending is protected only in cash terms, which with increased pupil numbers means a reduction in spending per student. Health care may be increasing just ahead of inflation and overall population growth, but increased demand from an increasingly long-lived population means that in reality the NHS will need to make significant efficiency savings just to stand still and provide the current level of care, let alone improve it.
So, roll on Comprehensive Spending Review. It’s going to a be a roller coaster ride for sure.