When George Osborne announces the 2015-16 departmental cuts today in the Commons, he will also spell out some more detail about how his plans for an AME cap will work. The idea behind this is that benefit spending will be treated more like departmental spending, where it is given a set limit, and then policies are adjusted to make sure spending doesn’t go higher than this.
In reality, this is little different to what happens now, as Ian Mulheirn of the Social Market Foundation explains here. But in terms of political rhetoric, this is an important tool for Osborne to claim he is clamping down on welfare spending.
Last month, we mapped out what each department could expect to face in the June spending review given the Treasury’s promise to keep cutting at the same pace as it has done before.
That study showed some of the most sensitive departments were in line for the steepest cuts. Local government was in line for £1.3bn of cuts, the business department, just over £1bn, and most sensitively of all, defence, nearly £700m.
Those calculations, however, only got us up to just over £7bn of cuts. We decided to take a cautious view, sticking to the idea of spending falling at the same trajectory as it has been so far, rather than striving to hit the £10bn figure.
George Osborne and Danny Alexander
This June, George Osborne will unveil his spending review for the financial year 2015/16. The chancellor is expecting to have to make around £10bn of cuts to Whitehall departments, which, as we revealed in the FT a few weeks ago, would mean some departments taking a particularly heavy whack.
Our figures show that cutting at the same pace as the government has done so far, which is what Osborne has promised, would mean another £1bn taken out of both the business department and the money that goes to local government. The defence budget, possibly the most sensitive of budgets, at least within the Conservative party, would fall by nearly £770m.
We reported this morning that Tory MPs are trying to make sure that the MoD doesn’t suffer further cuts at this year’s spending review. Mark Pritchard, a Tory backbencher, summed up the feeling of many of his colleagues when he told us:
Colleagues have, to date, reluctantly backed reductions in the MoD budget. However, any additional cuts to the defence, beyond those already agreed, will create a substantial political backlash. In short, the MoD budget has been cut enough, and the Treasury needs to look elsewhere for savings.
Pritchard and his colleagues should be on safe ground: the prime minister himself said that the defence settlement signed in 2010 would require “year-on-year real-terms growth in the defence budget in the years beyond 2015”.
This morning’s research from the IPPR lays out in thorough detail just how difficult George Osborne will find it to meet his fiscal rules when announcing his spending review for the period 2015-2017 next year.
The think tank has analysed the forecasts from the OBR and the Treasury and calculated the cuts needed to make sure the current structural deficit is cleared by the end of the five-year period and debt is falling as a ratio of GDP by 2015.
Firstly, let’s assume no cuts are made to welfare. If that is the case, the chancellor needs to make average savings of 3.8 per cent from departmental budgets. If spread equally among the departments, that would mean hugely controversial measures such as cutting the NHS budget by nearly £8bn a year and education by nearly £4bn.
David Cameron actually made three policy concessions this week. At this rate, he may as well install a revolving door at No 10. It’s another Lib Dem victory of sorts, but they’re not really crowing about it.
Buried in the documentation for the Universal Credit is a softening of the plan to cut payments for disabled people in care homes.
The spending review did not end in the way most people expected. When Cameron’s top team gathered around the Chequers table on Sunday to tuck in to roast lamb and Yorkshire puddings, there was virtually no talk of squeezing out extra savings to balance the books. They had money to spare.
This was not the impression given to the rest of the cabinet, or indeed the BBC. But the truth was that the Treasury was sitting on a small cash-pile. After agreeing all the big budgets, there was £1bn or more left in the emergency fund for the quad — Cameron, Clegg, Osborne and Alexander — to distribute.
“They went from the horsemen of the apocalypse to Father Christmas overnight,” said one official close to the final days of the spending negotiation.
This back of the sofa discovery is a feature of spending rounds. The Treasury always set cautious targets so there is some flexibility at the end. But how Cameron handled the mini windfall is revealing. It gives us an insight into both his priorities and the methods he used to bluff the BBC into paying for the World Service.
When George Oborne addressed the cabinet this morning his message was the usual one about trying to make the cuts as fair as possible and to “fall on the broadest shoulders”. The chancellor admitted that this was an “anxious time for some in the public sector” who could now lose their jobs.
Lord Adonis meanwhile claims in this morning’s FT that “Whitehall is stunned and morale risks plummeting” as the cuts reality dawns. This chimes with what I’m told by several civil servants who read this blog.
Many departments are already going through a redundancy process – instigated in June – even before the new £83bn wave of cuts which will see an estimated half a million public sector jobs go.
I am told of one leaving party for BIS staff, held in a local pub, which attracted three or four hundred attendees. The atmosphere was utterly morose. Meanwhile some civil servants are receiving letters giving them only a week to decide whether or not they want to leave. As for those who are quitting, there are rumours that they may not be paid their redundancy payments until the end of November – a six week gap. “It feels really chaotic,” one tells me. Yet this is only a foretaste of the cuts to come.
The axe is hovering over the £4.2bn council tax benefit bill. The details are patchy, but I’m hearing speculation that it could be cut by as much as 10 per cent. If it doesn’t emerge as one of George Osborne’s welfare savings today, it was certainly one he closely considered.
A cut is likely to involve some complex changes to some eligibility rules that are already incredibly complex. The rebate is currently paid to people on low incomes: lone parents, jobseekers and around 3.5m over-65s who are mostly on pension credit. But it is impossible to neatly sum up the criteria.
Has Michael Gove’s discreet approach to budget negotiations paid off? Education bravely resisted the shroud waving that marked the defence review. But it looks like Gove has emerged with a better deal than Fox, at least in terms of his resource budget.
We already know that schools spending — based on the Ed Balls baseline — will rise in real terms (albeit by a tiny amount). Today’s surprise will be that the education department will win the best settlement of all the unprotected departments. That means its resource budget will be cut by less than the 7.5 per cent imposed on defence. When it came to a stand-off between kids and frigates, the kids appear to have prevailed.
Now, as with all settlements announced today, the headline figure mask a great deal of pain. Spending channelled through local authorities (such as children’s services) will suffer. So will spending on 16 to 19 year olds. And of course the resource settlement does not include the education capital budget, which is about to be thumped.
There are some small signs of the coalition transparency agenda stalling a bit, at least with regard to the spending review.
1) No one has settled even if they’ve settled
Cameron has laid down the law: no talking about the spending review negotiations. Even if you’ve settled, you haven’t really settled. And if your numbers leak out, expect them to change.
Even so, the negotiations are moving on at a clip. We disclosed today that five departments have basically agreed deals with the Treasury: the Foreign Office, Cabinet Office, Treasury, Environment, and Culture. Some of them have reached a “provisional settlement” — and if you’re wondering what that means, so are we. I suspect it will stay that way until they’re announced by the chancellor. It sounds like a bit of a charade.
2) Even when you reveal the budget settlement, keep the details secret
There’s growing angst in some departments over the presentation of the spending review.
Everyone is busy in No 10 attempting to find some happy reform narrative that counters the impression that the government is obsessed with cuts (which it is). Meanwhile, to the surprise of some in the Treasury, a decision has been taken not to release all the bad news in one go.
There’s been lots of speculation over the Treasury’s plans on sickness benefit. The Times flagged up a proposal to “means test”, while the Observer has a letter pointing to £2.5bn of incapacity benefit savings from an unspecified reform.
No final decisions have been taken. But reading between the lines, it sounds like moves are afoot to scale back “contributory incapacity benefit” (which I’ll explain in a second).
If so, it blows a rather big hole in George Osborne’s claim that a he’ll be finding savings from ending the “lifestyle choice” of those determined to “pull down the blinds” and scrounge on benefits. These reforms largely take money from people who have worked and fallen ill, rather than those who’ve allegedly chosen a life on the “sickie”.