The government will need to set out £45 billion of savings in annual public spending by 2018-19 in order to keep its spending plans on track, according to new analysis published today by the Social Market Foundation (SMF).

In the report, One More Time: Repairing the public finances, the SMF’s analysis shows that the Conservatives’ manifesto pledge to cut £30 billion of spending excludes funding commitments for schools, the NHS and international aid. Further, the £30 billion figure only refers to savings needed in 2016-17 and 2017-18, and fails to take into account areas of spending outside the government’s direct control, such as debt interest payments, which are forecast to rise in 2018-19 and planned increases in capital spending. Taking this combination of spending commitments, protected budgets and rises in areas outside government control into account, the SMF estimates that the total savings needed by 2018-19 amount to £45 billion.

One More Time: Repairing the public finances also finds that the government’s deficit reduction plans are highly reliant on continued growth and face significant risks due to poor UK productivity and uncertainty in economic forecasts. The report shows that if potential economic growth continues at the rate estimated by the OBR for 2014-15, borrowing would fail to be eliminated by 2018-19, even if government implements the planned savings.

Nida Broughton, Chief Economist at the SMF and author of the economic analysis said: “We found that the Conservatives’ plan to save £1 per year in every £100 for 2016-17 and 2017-18, followed by a one year freeze in public spending in 2018-19, does not represent the full scale of the savings needed to meet their targets. This is because there are areas of spending that the government has pledged to increase across the parliament that have not been taken into account, such as the NHS, schools and international development budgets, as well as capital spending and areas that are outside its direct control, such as debt interest payments, which add a total of around £6 for every £100 spent before the cuts even start. Also not all of the £100 spent will be open to savings; it will more likely be around half that number. This is because a number of areas will be protected, or will not be within the Chancellor’s direct control – such as the state pension and debt interest. As a result, we found that the actual savings which the government has to make to meet its spending plans over the three years could be closer to £12 in every £100 across budgets within the Chancellor’s scope.”

Given the difficult decisions ahead for public services, the SMF recommends that the next Spending Review process focus not only on finding immediate early savings, but looks to address longer-term challenges. One More Time: Repairing the public finances sets out a two-phase approach to the Spending Review, which the Chancellor could follow to achieve this.

The first-phase ‘Efficiency Review’ would find the first half of the required savings, reporting by the 2015 autumn Spending Review. Assuming the £12 billion of welfare cuts set out in the Conservative manifesto can be fully identified, the SMF estimates this will leave just under £11 billion of savings to be found elsewhere, for example from departmental savings or through the reform of tax reliefs, an area which has so far escaped the scrutiny applied to other spending.

The second-phase ‘Reforms Review’ should consist of a longer programme, reporting in 2016, featuring thematic reviews looking across departmental budgets. The SMF recommends that these reviews are led and staffed by individuals with expertise in the relevant policy area, but who can take an objective, cross-departmental view. One option the report explores is the appointment of outgoing Permanent Secretaries to lead the work, alongside a Minister from a non-related area, a non-executive departmental Board Member, who can bring in wider commercial expertise, and an official from HM Treasury, whose role would be to maintain a strong focus on the potential implications of decisions for long-term economic growth.

Emran Mian, Director of the SMF and a former leading civil servant said: “Attempting to maintain the quality of government services while achieving £45 billion of savings leaves a set of difficult decisions for the next Spending Review process. We’re clear that the process needs to improve taxpayer value for money, whilst making growth-friendly choices. There is a need to find savings early to meet spending targets, but we argue the need to undertake longer-term reforms is becoming more urgent. The latter will require time, require expertise from within and outside government, and will most likely need to look across departments, especially where there are related areas of spending. This is why we urge the Chancellor to take a longer-term approach to the next Spending Review by committing to a two stage process.” Charles Lloyd, partner, PwC, commented: “The big saving opportunities have been targeted, and now the actions needed are much more transformational in terms of considering how services are funded and delivered. But delivering savings is only one element. We need strong and consistent growth to deliver the revenues that are needed to balance the books. Policies that support skills, employment, enterprise, and infrastructure are pro-growth, and need to continue to be prioritised.”

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