Reducing public spending: Key issues for the 2015 Parliament

Chart 1: Change in current government spending

Change in current government spending* over Parliaments
£ billions, 2013/14 prices

Each of the parties has its own plans that imply considerably different reductions in day-to-day spending; but they all require at least some cuts that, if followed through, could make the 2010s the most austere decade, in terms of public expenditure growth, of the post-war era.

How to apportion these spending reductions between different departments, functions and priorities is one of the most fundamental decisions that the new Government will take. 

Protecting some departments will lead to larger spending reductions elsewhere

There was consensus among the major parties before the election that, as in the last Parliament, expenditure on health and education should be protected, albeit in slightly different ways. They also committed to raising the state pension by at least 2.5% per year and increasing overseas aid in line with gross national income.

This implies that any spending reductions will be concentrated in the remaining, ‘unprotected' areas of public spending, such as benefits payments, defence and local government.

As a consequence, expenditure on ‘protected' areas, which currently comprises 44% of government spending on services, will come to account for an ever-larger proportion of the total during the Parliament.

Chart 2: Public sector expenditure on services

The major parties have committed to protecting large areas of public spending in the next Parliament.

Public sector expenditure on services, selected categories, 2013-14

How will these be achieved?

The Government could achieve spending reductions by cutting planned expenditure on ‘unprotected' departments. This is a ‘reliable' approach in the sense that what the Government plans, in terms of cuts, it tends to get: after all, departmental spending limits are directly within the control of the Treasury.

However, unprotected departments have already seen substantial budget reductions since 2010: to achieve these, administration spending was cut and the number of public sector employees was reduced by half a million.

In the next five years, it is not clear that ‘more of the same' – efficiency savings and staffing reductions – will generate the scale of spending reduction required. Changes to the way that services are provided could be necessary, along with a general re-prioritisation of the functions of government.

Alternatively, the Government could seek to reduce the welfare bill: excluding the state pension, this amounts to around £147bn. In the run-up to the election, cuts to the welfare bill were targeted by the Conservatives, who committed to reducing welfare spending by a total of £12 billion by 2017/18.

Like departmental spending, welfare expenditure was cut in the previous Parliament, so any reductions will come on top of those already implemented. But unlike departmental spending, welfare expenditure is not directly and precisely within government control: it depends partly on economic developments, particularly in the labour and housing markets.

The previous Government expected its welfare reforms to save £19bn by 2014-15, but in the end spending was just £2.5 billion lower.

Finally, the Government could mitigate some of the planned spending cuts through tax measures. In this context, there has been less focus on outright increases in tax rates than on clamping down on tax avoidance, evasion and aggressive tax planning.

Again, anti-avoidance measures were implemented in the last Parliament and there may be limits to how much more revenue can be squeezed from further schemes.

Moreover, the revenues available from such measures tend to be highly uncertain: for instance, the UK-Swiss tax agreement, signed in the last Parliament, was originally expected to yield £5 billion by March 2016; HMRC now expects it to yield just £1.7 billion.

Party Lines

• Conservatives: (…) reduce Government spending by 1% each year in real terms for the first 2 full financial years of the Parliament
• Greens: increase public spending to almost half of national income
• Labour (…) outside of protected areas there will be cuts in spending
• Liberal Democrats: increase public spending in line with the economy once the budget is balanced
• SNP: oppose further spending cuts and propose increases of 0.5% above inflation in each year of the Parliament