How to cut 25%

By Andrew Lilico

In our latest report on controlling public spending, out today, Policy Exchange has investigated detailed scenarios for achieving cuts in resource spending across six important government departments.  We explore the implications of 10% and 20% cuts scenarios in Education; and 25% and 40% cuts scenarios in BIS, CLG, DECC, the Home Office and the Ministry of Justice.

We consider the pros and cons of the spending, and assess possible savings according to their operational feasibility, the intrinsic merit of the programme, the scope for alternative provision, the impact on the objectives of the departments, and how long-established the programme is. This allows us to categorise cuts that have not already been announced as either intrinsically desirable (i.e. we would make such cuts even absent overall pressures on public spending), plausible (i.e. natural candidates for cuts if cuts must be made), or unpalatable (one should seek to make all intrinsically desirable or plausible cuts available across all other departments before resorting to unpalatable cuts).

Here's a summary of what we found:

Business, Innovation and Skills (BIS)

To reach 25% overall cuts (saving £4.8bn), on top of measures already announced we could also restrict the interest subsidy on student loans for new students to those who are low earners in their subsequent career (part of the reform of tuition fees which actually saves the government money), remove the budget assigned to providing BIS’ internal capability to deliver on its objectives, and the Train to Gain budget, along with cash freezes plus small additional operational efficiency improvements in Research Council grants and HEFCE funding for research and for teaching and learning (saving 10% to all these grants), plus a cut to the Technology Strategy Board and UK Space Agency.

Of these, we regard the cuts to subsidies of student loans, the internal capability programme and the Train to Gain as intrinsically desirable, whilst all the others are plausible. To reach a 40% target we would need to go further, cutting research and teaching grants by 25%, and cutting Other Business Support Programmes, UK Commission for Employment and Skills, Other Higher Education Funding, Other FE and Skills Funding, HEFCE Innovation Fund, and Other Science Programmes.We consider all of these cuts plausible.

Department for Communities and Local Government

To reach 25% overall cuts (saving £7.5bn), top of measures already announced we would also need to cut the Homes and Communities Agency (HCA) budget by 50%, the CLG contribution to the Olympics budget by 25%, and the Formula Grant to local authorities by 18%. We regard all of these cuts as intrinsically desirable except the cut to the formula grant, which we regard as plausible.

To reach a 40% target the cuts to the HCA and Olympics contribution budgets would have to be cut by 80% and 50% respectively (still plausible), CLG itself abolished as a department (plausible), and the cut to the formula grant extended to a much more unpalatable 33%.

Home Office

To reach 25% overall cuts (saving £2.4bn), on top of the public sector pay freeze already announced, we would also need to make efficiency savings from shared services, collaboration, and contracting out, reduce funding for policing by 5%, abolish the grant ring-fence, implement various departmental reforms, and increase departmental income. Of these the departmental reforms are intrinsically desirable whilst the other measures are plausible. To reach a 40% target, we would need to reduce central and local funding for policing by 10% (instead of 5%), and implement cuts to the area-based grant and a 10% real-terms cut in UBA. But even this would still leave us needing a blunt and unpalatable further pro-rata cut of 10% across all services.

Ministry of Justice

To achieve 25% cuts (saving 2.3bn), as well as the public sector pay freeze already announced, we would also need to institute certain departmental reforms, reduce the legal aid budget by cutting fees/scope, cut back on victims services, realise returns on certain assets, improve efficiency by contracting out one quarter of prisons and outsource the Probation Service, as well as increasing departmental income. Although the departmental reforms and the increase to income are desirable, and the other measures plausible, this would still leave us well short of target, and to reach the target there would need to be a blunt and unpalatable additional 10% pro rata cut to all services. To achieve 40% cuts, the blunt and unpalatable pro rata cuts would need to extend much further – a 20% pro rata cut.

Department of Energy and Climate Change

To achieve 25% cuts (saving £275m) we could implement the intrinsically desirable measure of transferring the resources devoted to “promoting low carbon technology in developing countries” to the International Development budget, where they properly belong, and where a decision can be made in relation to their merits compared to other aid projects. To achieve (indeed, to well exceed) 40% cuts we could also implement the intrinsically desirable measure of cutting back the “bringing about a low carbon UK” budget by about 70%.

Education

To reach 10% overall cuts in Education (saving £4.7bn), then on top of measures already announced we would also need to abolish the Education Maintenance Allowance and Extended schools funding, and scale back Sure Start to its original goal of reaching the 30% most deprived wards.

Of these, we regard the abolition of the Education Maintenance Allowance and the scaling back of Sure Start to be intrinsically desirable, whilst cuts to extended schools funding are, in our view, plausible. To reach 20% cuts, however, would be much more challenging.

To the above, we could add a plausible 10% cut to the dedicated schools grant (much of which could be achieved simply via a cash freeze, but that would still leave us around £1.8bn short of target. To cover that additional £1.8bn we would need to implement a blunt and unpalatable further pro rata cut to all services. It looks, however, like the budget for schools is likely to be protected. 

Overall comment

So overall, on our assessment, cuts on the lower scale can be achieved almost entirely by deploying a combination of cuts already announced, those that would be intrinsically desirable to make anyway, and cuts we regard as “plausible”.

Apart from in the Ministry of Justice, there is no need to resort to cuts that are unpalatable to achieve the aggregate spending reductions required on the lower scenario. It is perhaps surprising that there is so much “fat” in the system that cuts on this scale can really be made in so many areas so straightforwardly.

However, to achieve the higher cuts scenario, many unpalatable options would have to be implemented, including particularly blunt cuts in certain areas.

And of course, maintaining the ringfences to health and international development spending, along with the lower targets for cuts to Defence and Education, will mean that larger cuts, well above 25%, (perhaps averaging 33%) will now be needed in many other departments.

From this one might conclude that, although it would clearly be politically painful to, say, abandon the NHS ringfence at this stage, it could potentially be even more painful to be forced into fundamentally unpalatable cutting across a number of other departments. In particular, some of the more unpalatable cuts we explore might make it more attractive to look at welfare spending again.

However, this is not the only implication that can be drawn. For although cuts above 25% result in lots of undesirable measures in some departments, that is not true in all. In BIS, for example, we believe it would be possible to reach the 40% cuts level before exhausting all the cuts that are plausible. Although our study here covers a significant portion of non-ringfenced expenditure (55%), it is possible that the scope for achieving cuts well above 25% is even greater in the departments we have not considered than in the departments we have. If cuts of 40% or more are achieved where they are indeed feasible, that clearly creates headroom for cuts below 33% in other departments. And of course there remains the option of achieving greater cuts to the welfare budget than so far announced.

Thus, it is conceivable that the overall target of a 14% fall in departmental spending, or 25% average across non-ringfenced departments, can be achieved without the need to resort to large numbers of fundamentally unpalatable cuts or giving up on the NHS ringfence. Nonetheless, even the incomplete exercise here illustrates just how challenging this will be.