The First Cuts are the Deepest?

The new Conservative Government didn’t waste much time did they? Yesterday, George Osborne announced some £4.5 billion of largely ‘in year’ savings across almost every Whitehall Department. Even protected departments such as Health and Education have been expected to offer up savings for the greater good of deficit reduction. For Education – the ‘non schools’ bit – the figure is £450 million. That’s the same as the amount at BIS – and these are two of the biggest contributions from any Department.

First, let’s be clear what ‘in year’ means. It means now. It means that the spending expected this year in departmental plans and agreements and set out in grant letters from the likes of HEFCE or the SFA will be reopened and funding reduced. We don’t yet know by how much or where these funds will come from. Funding councils and agencies will have some choices to make and will be thinking about the trade offs between ‘across the board’ reductions and the ending of particular schemes or funds. We already know about the demise of the urban seagull study for example. Some will come from ‘underspends’ – programmes that aren’t fully committed or fully spent (actually quite common though only the Treasury will know how much this will be worth).

Is this the sign of things to come – the beginning of savage reductions set out before the election and validated by the OBR? Perhaps. Their forecasts look pretty severe. Challenging enough for the OECD to take fright. That’s the same OECD that had broadly endorsed the economic approach up to this point. The same OECD that BIS ministers still quote when they say they support the HE finance system (I’ve written elsewhere that this isn’t quite true: http://www.wonkhe.com/blogs/oecd-whose-side-are-they-on-2/).

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Fraser Nelson, the editor of the Spectator Has pointed out that the first few years of deep cuts, clearly much deeper than under the Coalition (and don’t forget that these are cumulative) look odd when the ‘spending splurge’ at the end of the Parliament is also factored in. It all looks much more political than economic in that by doing so, the Government keeps its promises to balance the books within three years and also to avoid the charge that public spending is back at 1930s levels. Obviously it also stores up a sizeable political war chest just in time for the next election in 2020. Just wait for that Budget.

But this isn’t and shouldn’t all be taken as bad news. Yesterday’s cuts shouldn’t just be seen as the start of things to come. Why? Two reasons. First, let’s look back at that chart. Look closely and you can trace the impact of the disastrous 2012 Budget. That was the ‘omnishambles’ Budget and easily George Osborne’s worst moment as Chancellor. Afterwards it is clear that spending plans changed. They were smoothed out in the way that the OECD want today and the Government effectively decided to take longer to bring down the deficit. It was basically a shift from Plan A to Plan B and spotted as such by many economists.

Many economists also expect the Government to do the same this time around and to smooth the deficit reduction programme over a longer period. Basically they argue that the economy can afford for it to be done in such a way. There are no alarm bells ringing, confidence is high, borrowing is cheap. But don’t expect the political narrative to say any of this. It will just be more of the ‘Long Term Economic Plan’, ‘Plan A’ and ‘tough decisions’. But we will wait and see.

More immediately let’s return to yesterday’s cuts and the forthcoming Budget scheduled for 8th July. This isn’t going to be a Budget that is just about savings and efficiencies. It’s headlines will also be about growth and productivity – about keeping the economy moving and developing. George Osborne has already promised a ‘Productivity Plan’ alongside it. He will want to announce new policies and new investment at that time. Initiatives and projects that speed up the kinds of growth that he and the Conservatives want to see in the next five years. Ideas like the Northern Powerhouse, the Research Partnership Investment and Catalyst funds as well as promised expansions of apprenticeships, Catapult Centres and National Colleges. The same Departments announcing cuts will also be bidding for new funds and projects in this process.

But in order to pay for these announcements, the Treasury has to find some money from somewhere. For years and years – and certainly back to Labour’s time and Gordon Brown’s as Chancellor, it has taken ‘underspends’, ‘savings’ and ‘efficiencies’ and recycled them from ‘lower priority’ to ‘higher priority’ spending. This means that yesterday’s cuts – though dressed up in the political language of tough choices and hard decisions – are only half of the story.

Yes it is true that there are ‘in year’ reductions for colleges and universities coming quickly down the line. But it is also true that there are going to be new opportunities – probably via competitive funds rather than allocated grants – that will open up. This is a Government giving itself more levers over spending and pulling on them to get the kinds of results that it wants. The Budget will offer the first round of these ideas and there are likely to be more to come. It means that there will be chances to make up for the inevitable losses. The scale of both are still up for grabs. So let’s hope the Government takes a rather more sensible approach about the speed and depth of savings. But let’s also make sure that we are providing enough ideas to make up for whatever comes.

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