Can Osborne cut the NHS?

The June spending review will set the agenda for the next election
April 24, 2013

At a time when most government departments are facing significant cuts, the health budget has been unaffected

Given the continually worsening economic situation, both the Autumn Statement and the Budget have been difficult. The spending review, in June, looks set to be considerably more so because the chancellor is going to have to say in detail what, so far, he has only outlined in aggregate. He is going to have to say exactly where a set of additional spending cuts will be falling in 2015-16.

These will come on top of substantial cuts to departmental spending over the period of this parliament. And, at 2.8 per cent, the cut pencilled in for 2015-16 is greater than the average annual cut over this parliament. Worse, for unprotected spending—that is, departmental spending other than health, schools and overseas aid, which David Cameron committed himself to protect until the next general election—the average cut is set to be more than 5 per cent.

We will learn on 26th June how those cuts will be allocated. What looks unavoidable, given these constraints, is that by the end of 2015-16 a group of departments—the home office, ministry of justice and local government, among others—will have seen budget cuts of as much as 30 per cent since the beginning of this parliament. At the same time spending on health will not have fallen at all, and non-investment spending on schools will also have been protected.

Not only is public service spending as a whole falling further than at any time in living memory, but its composition is changing. There is a major redistribution within that spending pot towards health and away from pretty much everything else.

But that is not the whole public spending story. So far we have been looking only at public service spending, which is falling. But total public spending is not. What’s the difference? The difference is what is known in government as Annually Managed Expenditure (AME), made up largely of spending on social security, pensions and debt interest.

This component of total spending continues to rise. Indeed it looks as if AME spending will, for the first time, form a majority of government spending after 2015. Roughly speaking, for every pound saved on departmental spending, an extra pound is being spent in AME. Why is that? Well obviously as debt levels rise the amount the government has to spend on debt interest rises. Spending on benefits, especially on pensioner benefits, also continues to rise, as does spending on public service pensions.

One can understand then why, in the Budget, George Osborne promised to look again at how this spending might be better managed. Short of reining in spending on pensioner benefits or imposing further cuts to working age benefits, though, his room for manoeuvre is limited.

There are three main effects of all this on spending review calculations. First, despite five years of cuts, total government spending in real terms in 2015 will be little different to the spending levels when this government came to office. As a proportion of national income it will remain higher than for most of the period under the last government. Only by 2017-18, after two more years of cuts, will its level as a proportion of national income return to that of 2004.

Second, additional cuts in some areas of government spending will bite very hard. To the extent that there was low hanging fruit to pluck in local government, the police and other services, it is likely to be gone by 2015. The consequences for both the real quality of public services and the way in which they are organised are likely to be considerable.

Third, the pressure to re-examine attitudes to hitherto sacrosanct areas of spending—pensioner benefits, the health service and schools—will be intense. As will be pressure to re-open settlements on public service pensions.

This coming spending review will set the agenda for the next general election in a way that no decisions yet made by this government have done. The choices are stark. None of the available options is likely to prove either easy or popular.