Five Things the Chancellor Should Do in the Spending Review

This week the Chancellor of the Exchequer will stand up in the House of Commons and set out how public spending will be change across government departments over the next four years... We've been thinking about what the Chancellor should do, and have picked out five things that he should consider as he finalises the spending review...

This week the Chancellor of the Exchequer will stand up in the House of Commons and set out how public spending will change across government departments over the next four years. This is a hugely important event in this parliament, as it will determine the path of public services spending for the rest of the decade. The early headlines do not look good: the Government intend to shield some areas of spending from the worst of the cuts, including the NHS, international Development, Defence and Schools. They also plan to increase capital spending. This means spending on public services outside these areas must be cut by an average of 27% in order for the Chancellor to meet his target of a surplus of £10billion in the 2018/19 financial year, unless he raises taxes. We've been thinking about what the Chancellor should do, and have picked out five things that he should consider as he finalises the spending review:

  1. 1. Don't cut Universal Credit to pay for a u-turn on Tax Credits

    Everyone is expecting Osborne to make a partial or full u-turn on his highly controversial cuts to tax credits, announced earlier this year. He has been criticised from all sides of the political spectrum for his planned cuts, which would raise £4.4billion but see an average of £1,300 taken from claimant families. Following an intervention by the House of Lords, George Osborne turned his sights on Universal Credit, the new benefit that will replace tax credits and five other working-age benefits by the end of this parliament, in order to pay for a U-turn. This provoked the ire of Iain Duncan Smith, leading to the Chancellor backing down once again. Now it seems he wants to target some of the other benefits being rolled into Universal Credit, such as housing benefit. As my colleagues at IPPR have pointed out, this would merely serve to shift some of the pain of tax credit cuts onto a similar group of families, many of whom are claiming both working tax credits and housing benefit. Just as bad would be another raid on disability benefits.

    The challenge facing the government is that they are so boxed in on welfare, having pledged to raise £12billion from welfare while also protecting most of the biggest items of expenditure in the welfare bill: pensioner benefits and child benefit. Now it seems we have to add tax credits and some aspects of Universal Credit to that list, he is rapidly running out of options. Either way it makes little sense to pay to reverse a cut to in-work benefits by cutting other in-work benefits. He could always try and save the money from public services, but that is likely to prove tricky (see below).

  2. 2. Give social care the funding it needs
  3. Unlike the NHS, adult social care is not planned to be protected in the spending review, even as the elderly population is set to grow. While the NHS is expected to receive £8billion above inflation by 2020, we estimate that local government is facing at the very least a 6% cut in its income out of which to fund services including social care, possibly larger. Trailed at the weekend, the plan to allow local government to raise council tax by 2% could bring in £2billion. While welcome, this is unlikely to be sufficient. The Resolution Foundation estimate that above-inflation increases in the National Minimum Wage and the introduction of the National Living Wage will cost the sector £4billion by 2020/21. Add in the cost of an ageing population and it is clear £2billion is not enough.

    This is short-sighted and has the potential to lead to a full-blown care crisis in the next few years. As has been documented at length in recent years, a poor funding environment for social care has put pressure on NHS beds and wider resources and is a large part of increasing funding pressure on both services. Alongside allowing councils to raise tax in order to pay for care, we recommend protecting key grants from central to local government in order to fund social care.

  4. 3. Invest where it will have the greatest impact
  5. Unlike wider public services, the government is actually planning to increase investment spending over the spending review period. This provokes an interesting question that has not been debated enough in recent months: where should this extra funding go? We have recommended three areas: tripling the budget of the Homes and Communities Agency in order to begin to reverse the historic decline in public housebuilding and fund 50,000 social rent homes a year, financing an integrated package of Northern transport infrastructure to boost economic growth in the north of England, and more than doubling investment in energy efficiency measures to ensure we are on track to upgrade all low-income households by 2030.

    Because of the generous growth in capital spending planned over the next five years, these three measures could be delivered while still increasing capital spending in other areas by a cumulative 5% above inflation.

  6. 4. And invest in young people as well as infrastructure
  7. One area we are very concerned about is 16-18 education. While schools are expected to be protected, by holding the cash value of spending per pupil constant, there are no such plans for those learners above school-age. According to the National Audit Office, further education colleges are facing severe financial difficulties, with the number in deficit doubling between 2010/11 and 2013/14.

    But the job that colleges and sixth forms do is more important than ever. Businesses are facing severe skills shortages from a growing economy and retiring baby boomers, with demand rising for those with a technical and vocational education. And while youth unemployment has fallen in recent months, it is still higher than before the 2008/09 recession. We recommend protecting 16-18 education in the same way as schools spending, in order to arrest the decline in the sector's financial position and to prioritise spending on an area of policy vital for UK economic growth and productivity.

  8. 5. Raise some tax to pay for it
  9. It is easy to point out areas of spending that should be protected, but that isn't very helpful unless you have some idea of how it should be paid for. The simplest way to unlock extra resources would be to reduce the £10billion surplus the chancellor expects to achieve in 2019-20. We have suggested that this be reduced to £7billion and the path of deficit reduction shifted in order to unlock extra resources.

    The alternative would be to raise taxes. The government has already floated the idea of a 2% rise in council tax to fund social care. This is unlikely to be enough. We would like to see at least £5billion raised in tax, through measures similar to those announced at the July budget this year: a rise in the insurance premium tax, reduced pension tax breaks for high earners, and aligning the rate of capital gains tax with the new dividend income tax.

    Any way you look at it, this Spending Review is going to be tough, and excruciatingly so if the Chancellor isn't willing to be flexible on the deficit and on tax measures. Reducing the planned surplus and raising tax in this way is entirely consistent with the Government's fiscal charter and with their manifesto, and is a small price to pay to prevent some of the most egregious cuts from going ahead.

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