John McLaren: Deepest cuts still to come

With a general election and a referendum looming, the parties are busy kicking the tough decisions into the long grass, writes John McLaren. But they will have to be faced

Some areas, such as the NHS, continue to be protected at the expense of deeper cuts in other areas. But that may change after the next election. Picture: PA

The Centre for Public Policy for Regions’ latest analysis of the Scottish budget shows that, in terms of the timescale, we are only half-way through the current period of austerity and that, as far as cuts go, we are only just over the half-way mark.

However, this big picture hides some upcoming difficulties that political parties are being slow to face up to. While the cuts to capital (investment) spending are now over, most of the cuts in day-to-day (resource) spending are still to come. What’s more, the public services being targeted for the biggest cuts in day-to-day spending will be identified only after the referendum on independence and the next UK election.

There is a lot of kicking into the long grass going on. The reason for this is not difficult to identify. The size of the cuts in day-to-day spending in 2016-17 and 2017-18 are as big, or bigger, than in any year experienced so far.

This second wave of cuts has emerged as the fiscal consolidation process at the UK level, a consequence of the recent global financial crises and the subsequent recession, proved slower than expected, largely due to a slower economic recovery.

The coalition’s response to this has been to keep its budget-rebalancing targets, but to extend the time period over which they are to be met. In order to do this, bigger cuts are needed, but only after the next election. That was why this year’s spending review by the UK government, rather unhelpfully, covered only one year, 2015-16.

The spending cuts are now expected to take up 85 per cent of the rebalancing effort, with tax rises the other 15 per cent, which compares with the 80:20 split originally intended by the UK government. This potentially leaves some leeway to raise taxes in order to soften the blow and reduce the extent of future cuts.

However, we would appear to be entering a pre-election phase in the UK, where tax rises are being ruled out as a way of rebalancing the budget. Both the Chancellor of the Exchequer and the Prime Minister have recently stated that tax increases are not required to bring finances under control. Equally, the Labour Party is now committed to sticking with the coalition’s plans at least up to 2015-16, with no commitment to more money or more taxes thereafter.

In Scotland, the SNP government has also avoided outlining where it would seek to make the implied cuts, post 2015-16. This may be explained by the potential change of circumstances brought about by a Yes vote in the referendum. But this ignores the reality that, in practice, similar fiscal circumstances are almost bound to exist for an independent Scotland and so greater clarity would also be needed in terms of a medium-term to long-term budgeting strategy, with or without any oil fund.

At present, it seems inevitable that the cuts will keep on coming – and indeed start getting bigger in some cases. This begs the question: can we go on keeping on cutting departmental budgets for the next four years, as we have been doing for the past four years? At the time of its last “Green Budget”, the Institute for Fiscal Studies (IFS) expressed the view that overall cuts of the magnitude of 25 per cent to 30 per cent for budgets which are not protected – such as police and local government – “looks close to inconceivable”, and yet that is the way we are heading.

What is particularly perplexing is the relentless way that some big budgets and expensive policies (for example, the NHS, schools, benefits to pensioners and the freezing of council tax) continue to be protected at the expense of deeper required cuts in other areas.

Even if you only take the protection of the NHS into account, then the knock-on impact for day-to-day spending in all other non-NHS public services in Scotland is that it results in a real-terms fall of around a quarter over the period 2009-10 to 2017-18. At some point there has to be a trade-off between further cuts in some of these non-NHS budgets and keeping on protecting the NHS, or between such cuts and increasing taxes, be they UK-controlled, such as income tax, or Scottish Government-controlled, like council tax.

And it is quite possible that 2017-18 may not see the end of the cuts, at least to some budgets. Real-terms cuts may continue beyond then, particularly if economic growth remains at current low levels.

Furthermore, even if real-terms economic growth returns, should the NHS and schools budgets continue to be favoured, then it may be the case that other budgets continue to face real-terms cuts post 2017-18.

Cuts of the size of 25 per cent or more will inevitably have a huge impact on delivery of public services, and yet there is very little discussion in Scotland on which public services should be prioritised and on the cumulative consequences of such selective protection.

If we are reaching a crunch point in terms of needing to decide which public services should have the highest priority and of how much tax we wish to pay for them, then it is not one that political parties seem keen on facing up to. Difficult decisions are being delayed until after the next key political date in the calendar.

The hope for renewed economic growth to sweep away such problems persists, and yet there is little evidence that, even if growth returns, it is going to be at such a pace that it can resolve them. The picture for future long-term growth remains more subdued than was seen over recent past decades.

Whether it be under independence or as part of the Union, Scottish voters have very little idea of what public-service landscape awaits them in the years ahead, and in particular with regards to where the second wave of cuts will land.

A fundamental review of public spending is needed, but will almost certainly not happen until late 2015 at the earliest.

The more pressure that is put on all political parties to explain their post-2015 public-service priorities, and how they intend to pay for them, then the better will be the ability of the electorate to judge which way they should vote.

• John McLaren is an economist with the Centre for Public Policy for Regions.