Austerity after 2015: why the worst is yet to come

Without further welfare cuts or tax rises, the next government will have to cut departmental spending 50% faster.

With a week to go before the Spending Review, reports suggest that the Treasury has secured just a third of the £11.5bn of cuts planned in 2015-16. Yet amid the claim and counter-claim about how far departmental budgets can be squeezed, it is worth reflecting on how the review fits into the broader context of deficit reduction. If current plans are to be delivered, this round of cuts is merely an hors d'oeuvre for a far more painful set of decisions to be made after the next election.

New analysis by the Resolution Foundation shows that departments are already expected to be some 9% smaller on average in 2014-15 than in 2010-11 as a result of cuts in the 2010 Spending Review. With spending on health, schools and overseas aid protected, these have been far starker for some departments. At the extreme, the Foreign Office will be just half of its previous size, while the communities department will have shrunk by more than two-fifths. More typically, the defence budget will have fallen by 17%, while the Home Office will have suffered a 25% cut.

Not surprising, then, that the 2.6% of additional savings called for in 2015-16 are proving hard to find. With health, schools and overseas aid once again protected, the government’s plans imply average cuts of 8% across all other departments. With every additional pound of savings harder to identify than the last, don’t be surprised if the Chancellor decides to raise extra revenue from further welfare cuts.

Yet the new analysis also shows that - if the current deficit reduction timetable is adhered to — there’s (much) more to come. Painful though the current process is, existing plans imply a further £26bn of cuts between 2016 and 2018. This would mean either accelerating the pace of departmental cuts or introducing major new welfare cuts or tax rises. As tough as 2015-16 may be, this year’s Spending Review would merely be the calm in the eye of the storm.

What does this mean in practice for the years after 2015? Delivering the current plans without further welfare cuts or tax rises would imply speeding up departmental cuts by 50%. If health, schools and aid spending is again protected, that would imply cumulative cuts to unprotected departments by 2017-18 that begin to look implausible. Defence and the Home Office would be between one-third and one-half smaller than in 2010-11. The Foreign Office would be two-thirds smaller than it was seven years before.

This scenario would have profound implications for the role and shape of the state. Total departmental spending would have fallen 18% between 2010-11 and 17-18. Within that total, the proportion going to health would have increased from one-quarter to one-third, while spending on defence would have fallen from 10% to 8%.

Of course, the government could decide to ease post-2015-16 departmental cuts by seeking more from welfare or tax. Yet our new analysis reveals that simply keeping post-election departmental cuts to their current pace will require an extra £10bn from welfare or tax over two years. For a sense of scale, this is the equivalent of finding more in two years than will be cut from the tax credit budget in seven (£9bn). Alternatively, it would mean raising VAT from 20% to 21%. Hardly options that will help to ease the decade-long squeeze on living standards.

In reality, any post-2015 government would be likely to adopt a combination of measures. In particular, we can expect to hear more in the coming weeks and months about a potential cap on ‘structural’ aspects of Annually Managed Expenditure (AME). While both the government and the opposition have declared an intention to grapple with these aspects of spending, practical and political constraints mean their options are limited. Once we rule out the non-welfare parts of AME (e.g. debt interest payments) and politically-sensitive benefits (the state pension) that leaves less than one-third to work with. Within this envelope, housing benefit, tax credits and the employment and support allowance would appear to be in line for cuts. Determining which aspects of such payments are structural and which are cyclical will be a difficult task.

Finally, we might expect calls for cuts in pensioner benefits to intensify. Under current plans, the proportion of welfare spending accounted for by the State Pension and associated benefits is set to increase from 42% in 2010-11 to 48% in 2017-18. The government’s ‘triple lock’ means that this is a product not just of demographics, but of increased generosity per pensioner. Average pensioner payments are set to increase by 6% over the period at the same time as average working-age support declines by 15%.

Of course, we shouldn’t forget that all of these numbers depend heavily on deeply uncertain estimates of the output gap, a figure that has been revised dramatically in the past and may well be revised again. But it’s difficult to see past the likelihood that the post-election period will bring with it a new suite of difficult choices, from departmental cuts that look increasingly hard to deliver to further cuts to working-age support or the introduction of unannounced tax rises. Ultimately, we might be looking at further slippage in the deficit-reduction timetable. Don’t rule out the chance of it being all four.

Matthew Whittaker is senior economist at the Resolution Foundation

George Osborne during a visit to a branch of Lloyds bank on June 19, 2013 in London. Photograph: Getty Images.

Matthew Whittaker is senior economist at the Resolution Foundation

Photo: Getty
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Sooner or later, a British university is going to go bankrupt

Theresa May's anti-immigration policies will have a big impact - and no-one is talking about it. 

The most effective way to regenerate somewhere? Build a university there. Of all the bits of the public sector, they have the most beneficial local effects – they create, near-instantly, a constellation of jobs, both directly and indirectly.

Don’t forget that the housing crisis in England’s great cities is the jobs crisis everywhere else: universities not only attract students but create graduate employment, both through directly working for the university or servicing its students and staff.

In the United Kingdom, when you look at the renaissance of England’s cities from the 1990s to the present day, universities are often unnoticed and uncelebrated but they are always at the heart of the picture.

And crucial to their funding: the high fees of overseas students. Thanks to the dominance of Oxford and Cambridge in television and film, the wide spread of English around the world, and the soft power of the BBC, particularly the World Service,  an education at a British university is highly prized around of the world. Add to that the fact that higher education is something that Britain does well and the conditions for financially secure development of regional centres of growth and jobs – supposedly the tentpole of Theresa May’s agenda – are all in place.

But at the Home Office, May did more to stop the flow of foreign students into higher education in Britain than any other minister since the Second World War. Under May, that department did its utmost to reduce the number of overseas students, despite opposition both from BIS, then responsible for higher education, and the Treasury, then supremely powerful under the leadership of George Osborne.

That’s the hidden story in today’s Office of National Statistics figures showing a drop in the number of international students. Even small falls in the number of international students has big repercussions for student funding. Take the University of Hull – one in six students are international students. But remove their contribution in fees and the University’s finances would instantly go from deficit into debt. At Imperial, international students make up a third of the student population – but contribute 56 per cent of student fee income.

Bluntly – if May continues to reduce student numbers, the end result is going to be a university going bust, with massive knock-on effects, not only for research enterprise but for the local economies of the surrounding area.

And that’s the trajectory under David Cameron, when the Home Office’s instincts faced strong countervailing pressure from a powerful Treasury and a department for Business, Innovation and Skills that for most of his premiership hosted a vocal Liberal Democrat who needed to be mollified. There’s every reason to believe that the Cameron-era trajectory will accelerate, rather than decline, now that May is at the Treasury, the new department of Business, Energy and Industrial Strategy doesn’t even have responsibility for higher education anymore. (That’s back at the Department for Education, where the Secretary of State, Justine Greening, is a May loyalist.)

We talk about the pressures in the NHS or in care, and those, too, are warning lights in the British state. But watch out too, for a university that needs to be bailed out before long. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.