Comprehensive Spending Review

The below is a brief summary analysis of the 2010 Comprehensive Spending Review (CSR).

Background

The Spending Review is a treasury-led process to allocate resources according to Government priorities. The entire process was overseen by the Public Expenditure Committee (“Star Chamber”) of senior Cabinet Ministers appointed by the PM and chaired by the Chancellor. This was also subjected to the opinions of the Independent Challenge Group made up of public service experts [1].

Following the June Budget, which set out the overall level of public spending for the next four years, the CSR allocated spending for all areas of Government activity. This includes the spending budgets for each department (Departmental Expenditure Limits or “DEL”) and a range of non-departmental spending, including social security (Annual Managed Expenditure or “AME”). After departmental expenditure has been announced, devolved administrations and local authorities will have to finalise their plans after the local government finance settlement in late November. Clearer details on the future of services and public sector jobs will emerge after that point.

The June Budget announced that spending is set to increase from £640bn in 2011/12 to £659bn in 2014/15. This takes into account general inflation and planned economic policy and amounts to a total of £83bn in spending cuts over a four year period. This is set against £29bn of proposed tax increases - a ratio of 74:26 [2]. Out of this total, £30bn were announced alongside the June Budget – including £11bn in welfare, £3.3.bn from a freeze in public sector pay; £6bn in efficiency savings; and £10bn from lower debt interest payments. The government expenditure for 2010-11 is £697bn as opposed to £548bn in receipts, meaning large amounts of government borrowing. The plan will reduce borrowing from 11% in 2009-10 to 1.1% in 2014-15.

Later this year, each Government department will publish a plan for implementing the reforms, including key indicators against which to measure costs and impacts of its activities, although the CSR document states that it is not currently possible to subject the review to a full equality impact assessment.

Content

The framework for the Spending Review was initially laid out in June so there was a certain level of foresight prior to today’s announcements [3]. In introducing the CSR, George Osborne claimed that the proposals were supported by key economic bodies such as the OECD and IMF and that they would have a particular focus on reducing welfare costs and focusing spending on health, schools, early years and capital investment. Public spending in real terms is set to decrease to 2008 levels and will focus on supporting economic growth via private sector job creation, exports, investment, and enterprise.

Departmental budgets

Following forecasted departmental cuts of 25%, the CSR made the unexpected announcement that the average cuts to departments would be 19% across four years (with the exceptions of Health and International Development). The main departmental budget projections for 2014-15 were as follows:-

BIS – decrease of 25%
Cabinet Office – increase of 28%
Communities & Local Government – decrease of 27%
Culture, Media & Sport – decrease of 24%
Defence – decrease of 7.5%
DWP – increase of 2.3%
Education – decrease of 3.4%
Energy and Climate Change – decrease of 18%
Environment, Food & Rural Affairs – decrease of 29%
Foreign Office – decrease of 24%
Health – increase of 1.3%
Home Office – decrease of 23%
International Development - increase of 37%
Ministry of Justice – decrease of 23%
Treasury – decrease of 33%

It is worth noting that the initial budgets of these departments vary widely between £9.87bn to £0.2bn so average reductions may be distorted by large increases to the budgets of relatively small departments such as the Cabinet Office and DfID.

Education and skills

In terms of further education, the CSR was fairly bold. The entitlement to free training for a first full level 2 qualification (GCSE A-C equivalent) for those over 25 has been removed. Also, the work-based Train to Gain scheme was disbanded in its entirety and the Treasury has promised to explore mechanisms to increase employer contributions to training such as voluntary training levies.

Individuals over 24 have been promised the support of a Government backed loan to meet the tuition costs of a level 3 qualification (A-Level equivalent). Spending on Adult Community Learning will also be protected and reformed, although substantial details were lacking on this matter. Meanwhile, the growth in Apprenticeships gained more momentum with a promised 75,000 increase in adult apprenticeships with an additional £250m funding per year by 2014-15.

The full plans for Higher Education have yet to fully emerge following the recently published Browne Review. Higher Education is set to make up around 40% of total savings to the budget for BIS (25% decrease overall). Universities have been told that they are able to increase student contributions by the 2012-3 academic year (offsetting future reductions in the teaching grant) and that there will be loan support for part-time students for the very first time. A National Scholarship fund of £150m a year to support the most disadvantaged pupils to enter Higher Education was announced and the Government will decide whether to sell off Student Loan book in next year’s budget.

The schools budget is set to increase by 0.1% in real terms. A “fairness premium” worth £7.2bn over four years was announced, which includes the extension in free care and early education for the disadvantaged to two-year olds. Continued support for 16-19 learning was announced despite a proposed cut to the Educational Maintenance Allowance of 0.5% and reductions to the unit costs of 16-19 education. Reductions to the Department for Education’s non-schools budget will total 12%. Sure Start funding has been protected, however, as has £15.8bn of capital funding for school building via the previous administration’s Building Schools for the Future programme.

Voluntary sector

The major announcement for the voluntary sector was the launch of a £100m “Transition Fund” which will be available over the short term to help medium to large organisations which are currently dependent upon the state but could make a continued contribution to public services. Alongside the Transition Fund, the Government has promised to direct around £470 million over the next four years to support capacity building in the voluntary and community sector, including funds to pilot the National Citizen Service and the launch of the Big Society Bank.

In terms of opening up service provision, the CSR promised to explore how to set proportions of specific services that should be delivered by non-state providers, including voluntary groups. This approach is to be utilised in adult social care, early years, community health services, pathology services, youth services, court and tribunal services, and early interventions for the neediest families. The Community First fund and Community Organisers also received the go ahead (but without details on how much funding they will receive or how many community organisers are to be trained).

Overall resource savings of 35% will be made to the Cabinet Office budget, which will largely consist of reductions in the use of consultants, back office services, and renegotiation of supplier contracts. The Office of Government Commerce and DirectGov will also move into the Cabinet Office. There will also be greater scope for personal budgets across a range of service areas including special education needs, support for children with disabilities, long term health conditions and adult social care.

Welfare and pensions

The DWP’s proposed Universal Credit system is set to be introduced over the next two parliaments in order to simplify current benefits. There will also be £2bn in funding to help implement the welfare reforms announced in the June Budget.

Savings of £7bn a year are set to be made to the welfare budget through the a range of measures, including the withdrawal of Child Benefit from higher rate taxpayers (£2.5bn); reform of the Employment and Support Allowance (£2bn); and a maximum cap on the amount in benefits that the out-of-work may receive (£500 per week for couples or lone parents and £350 for single adult households) [4].

Other welfare measures which will create costs rather than savings include increases to Cold Weather Payments and the weekly Child Tax Credits. Increased action to prevent benefit fraud is also expected to lead to savings.

The state pension age is to rise to 66 by 2018 and there will be major reforms to public sector pensions following the publication of the Hutton Report. The Government will seek changes to the level of employee contributions to help deliver an additional £1.8bn of savings a year by 2014-15. Government will also launch a consultation on the Fair Deal policy, which currently acts as a barrier to voluntary sector public service provision due to complications around TUPE payments.

The Office for Budgetary Responsibility has forecasted that the public service workforce will be reduced by 490,000 in 2014-15. Action has been promised to encourage those who suffer from job losses to undertake reduced hours and help move into private sector employment.

Health

As anticipated, spending in the NHS is set to grow in real terms by 0.4% every year. Significantly, the CSR declared an additional £2bn by 2014-15 to support social care, half of which will be spent on the current Department of Health grant to local authorities for social care (the Personal Social Services grant). The NHS is also committed to £20bn administration and management savings per year to be reinvested in frontline service.

Housing and Local Government

Major reforms were made to social housing as social landlords have been given the ability to offer short-term rental contracts to new tenants at levels between current and market rates (possibly around 80% of market value according to various media sources). The rates for existing social tenants are expected to remain the same but the changes are hoped to allow enough savings for the construction of 15,000 new affordable houses.

The Department for Communities and Local Government will lose 51% of its budget in real terms by 2014-15; although this will involve devolving £1.6bn of funds to local government. There will be a reduction to the number of Arms Length Bodies by 17. Programmes such as the Working Neighbourhoods Fund, Growth Area Funding and the Thames Gateway programme are all set to end, although the Supporting People Programme has been promised £6bn of funding over the CSR period.

All local government revenue grants will be removed from their ringfences by 2011-12, except for the simplified schools grants and a new public health grant. Community budgets will be established in 16 local areas to pool departmental budgets for families with complex needs, and rolled out to all local areas at a later date. The Regional Growth Fund to encourage private sector development is also set to be extended to 3 years and increase in value from £1bn to £1.5bn.

Arts and culture

The Department for Culture, Media and Sports is set to reduce its overall administrative costs by 41%, including for Non Departmental Public Bodies, with many making savings of 50% (including Arts Council England). Cultural institutions such as museums will be given the opportunity to use money raised independently more flexibly and establish trust arrangements that enable them to generate funding from private sources. In addition, the Government will undertake a review of ways to increase philanthropic giving to the arts. Cuts to core programmes such as Museums, frontline arts projects and Sport England will also be limited to 15%.

International Development

As anticipated, the Department for International Development escaped the spending cuts. A total of 0.7% of Gross National Income has been promised on overseas aid from 2013 in line with international commitments. A new Independent Commission on Aid will also be established in order to assess value for money on international development spending and future policy will be increasingly focused on boosting economic growth and wealth creation.

Environment and Climate Change

The Chancellor spoke at length on the necessity of low-carbon initiatives to his plans of economic growth. The CSR has promised a range of initiatives aimed at higher level manufacturing but those with more relevance to the local and community-level include the £860m promised to support households to implement renewable heating and the creation of the long-promised Green Investment Bank with £1bn funding (plus further private investment).

Annex

A useful glossary to terms used in the Spending Review may be found on the Treasury website.

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[1] The sole voluntary sector representative on this body was Kevin Curley (CEO of NAVCA).
[2] In contrast to this, the Labour party’s proposals were to balance spending cuts and tax rises in a ratio of 60:40
[3] Indications of its content were also inadvertently leaked when Chief Secretary to the Treasury Danny Alexander was photographed reading a draft which indicated 490,000 public sector job losses by 2014-15.
[4] This will be with the exceptions of all Disability Living Allowance claimants, War Widows, and working families claiming the working tax credit.

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