Next week George Osborne will deliver the results of the 2015-16 spending review – his latest effort to cut the government’s deficit.
The chancellor is aiming to cut another £11.5bn from spending on top of the £81bn planned from 2010 to 2015. The past weeks have seen the Treasury in talks with government departments over what additional contributions they could make. Most will have to find a further 10%, though wrangling continues between the Exchequer and some of the larger departments.
Others have already agreed the extra savings and reports suggest that, at the time of going to print, the chancellor has so far found £3.6bn of his target.
Further cuts could have a large impact on the government’s estate, already undergoing enormous change as departments search for savings and efficiencies for the current budget round. Information released by the Cabinet Office in March revealed that Whitehall had already disposed of more than 700 assets, generating £1bn in revenues, while exits from more than 1,000 leasehold and PFI properties have raised another £168m.
But Alex Dawson, public sector property director at Savills, warns that the deepest cuts are yet to come. “All of the departments are really under pressure now,” he says. “A lot of quick wins have been ticked off and so the next moves are more complicated. The Government Property Unit has done a good job so far rationalising offices. I think it should now be given a wider remit to look across the entire estate to make further savings.”
Jonathan Goring, managing director at Capita, says there is a huge gulf between departments that are well positioned to tackle the additional cuts and those that are not. “It’s all down to how well the departments know their estates,” he says. “This knowledge and understanding is what will help them rationalise on a broader, more long-term scale. At one end you have the Ministry of Justice, which appears to have really got on with things. They have categorised and mapped their estate and so they know what they’ve got and where they can make savings. Defence is somewhere in the middle. Then at the other end of the spectrum you have health. They have the biggest estate and the least knowledge. This will make managing it extremely difficult.”
Dawson adds that whatever next Wednesday brings, the cuts will inevitably mean more work for well positioned property firms. “There will be more surplus property and rationalisation opportunities and plenty of consultancy and transactional work.”
To gauge just how prepared the public sector is for yet another round of cuts, we look at eight government departments to consider what needs to be done to tackle the next blow of the axe.
Dennis Turner: On economics
The 2013 spending round is top of George Osborne’s agenda. The chancellor is putting the finishing touches to his plans to reduce public spending by £11.5bn in this period, over and above the cuts already announced. But capital spending will be increased by £3bn. At the same time, some expenditures – on health, education, pensioner benefits, counter-terrorism and overseas aid – are ringfenced, which means other departments will be squeezed even more tightly.
About half of all departments have now agreed to cuts of 8%-10%, although some of the biggest-spending departments have yet to sign up to reductions. In fact, less than a third of the £11.5bn cuts have been agreed.
It is clear that the Whitehall machine is set for further pruning. An authoritative body has estimated that, by the end of 2015-16, the budgets of some departments could be as much as a third less than when the coalition took office in 2010.
Austerity’s impact
And it will not stop in 2016 because the deficit will still be too high and national debt will be close to 90% of GDP. The total impact of this “austerity” programme could be to reduce the number of public sector jobs by a million by 2018.
Not only does Mr Osborne have to worry about the UK’s fiscal position, but he needs to ensure that he does not squeeze so hard that the economy grinds to a halt.
In this respect, at least, he may now be able to breathe a little easier. There is an increasing number of indicators, not least from the labour market, to suggest that activity is at last moving in the right direction, slowly perhaps but growth is starting to gain momentum. This means the need to use the spending round to stimulate activity is less pressing.
It makes sense that capital spending should be the area where the chancellor loosens the purse strings a little. Boosting consumer spending by cutting taxes is an artificial stimulus that will offer a greater benefit to overseas suppliers than to UK firms. Far more important is the need to persuade the cash-rich companies in the UK to start spending and begin to clear the investment backlog. The government’s extra £3bn of capital spending could contribute to this process.
Transport and construction spending are likely to be at the front of the queue for the new investment. As well as HS2, there are proposals to upgrade the A14 and for a new bridge across the Mersey.
And, after measures to help homebuyers in his Budget, Mr Osborne is aware of the need to encourage housebuilding if another price bubble is to be avoided.
Little room for manoeuvre
In the end, he has little room for manoeuvre, but whatever he does will be overhyped, as it always is. Bigger issues remain beyond 2016, especially whether the original balance of 80% spending cuts and 20% tax increases can be maintained in the light of an ageing population, the decline of North Sea oil and the rising costs of healthcare. “Austerity”, defined as squeezing public sector services and reducing the role of the state in the economy, has a long way still to run.
Dennis Turner is former chief economist, HSBC
