This week the Conservatives have confirmed that if elected in 2015 they will increase NHS real spending in England, maintain planned levels of pension expenditure and make deep cuts in working age welfare.
Analysis by the Fabian Society, based on the OBR’s latest Economic and Fiscal Outlook report reveals that this will lead to £40 billion being cut from all other current public service spending. The numbers may be cautious because they assume that the £12 billion of social security cuts will be diverted to public services and that overall spending will not be slashed even further than previously announced to pay for the tax cuts unveiled today.
The calculations reveal that total departmental spending, excluding the NHS in England, will fall from £208 billion in 2014/15 to £169 billion in 2018/19 (2014 prices). As a result, spending on public services (apart from the NHS in England) will fall from 12.1 per cent of GDP today to just 8.9 per cent in 2018/19. This is an unprecedented decline, which will call into question the viability of many public services.
The announcements regarding social security also have huge implications for low and middle income families. Spending on non-pension social security will be £10 billion lower in 2018/19 than today at a time when average earnings and GDP are expected to be rising. This will lead to non-pension social security falling from 7.4 per cent to 6.2 per cent of GDP in just four years. With less of the nation’s prosperity being spent on supporting low and middle income families, their living standards will rise by far less than growth in GDP or average earnings. Median incomes will continue to stagnate and poverty and inequality will inevitably increase. At the same time the Prime Minister today promised a tax giveaway of around £2,000 per year for every higher rate tax payer.
The Conservatives’ announcements also continue a worrying shift in the balance of public spending highlighted in the Fabian Society’s 2013 report 2030 Vision: the final report of the Fabian Commission on Future Spending Choices. The share of total spending devoted to the state pension and the NHS in England will continue to rise, from 31 per cent in 2012/13 to 35 per cent in 2018/19. Health and pensions are both laudable priorities but the Conservatives’ plans mean that all other departmental spending will fall from 33 per cent in 2012/13 to 26 per cent of overall spending in 2018/19. Future-oriented spending on children, schools, skills and science will all suffer, with long-term implications for the country’s prosperity.
The Fabian Commission on Future Spending Choices called for a long-term strategy for public spending to be agreed early in the next parliament. This would ensure that future-oriented spending is not squeezed by immediate needs. This may imply raising more taxes or adopting different fiscal rules. For example if the Labour Party comes to power in 2015, the IFS calculates that its fiscal rules would allow it to spend up to £28 billion more than the Conservatives plan to, while still reducing national debt during the parliament. The extra money could be used to rebalance spending, by reducing the extent of planned cuts to non-NHS public services and social security.