Nick Pearce is Director at the Institute for Public Policy Research (IPPR) and a former Head of the Number 10 Policy Unit.

George Osborne could be forgiven for complacency. His political opponents are in disarray and retreat.  His personal standing has never been higher. He holds sway over the English political landscape.

His July Budget earned him plaudits, despite the acute and painful cuts it made to social security for working age families. He deftly smoothed out the path of deficit reduction over the parliament, and increased the tax take to ease departmental spending reductions. But he still left himself a major task in the forthcoming spending review. Protecting spending on the NHS, defence, schools, and international aid implies very deep cuts everywhere else. The low-hanging fruit is gone. This time it gets really tough.

Now that the generals don’t have to march up Downing Street with their rusty rifles, the heaviest pressure on the Chancellor will come from local government. Having borne the brunt of cuts in the last Parliament, local councils face a further reduction of 25 per cent or more in their budgets if the Chancellor doesn’t extend greater protection to their spending.  Deeper social care cuts would simply push more older and disabled people onto the NHS, where the cost of meeting their needs is higher. At the same time, care assistants – long overdue a pay rise – will benefit from the Chancellor’s new, higher rate of the national minimum wage for over 25s, the so-called National Living Wage. This will put further pressure on social care commissioning budgets.

He will not want his surprise minimum wage move to unravel. It is at the heart of his claim to the centre-ground of politics, and underpinned his deal with Iain Duncan Smith to cut tax credits. Moreover, he has good reason to want to keep local government on side. It is his partner in the Northern Powerhouse and English devolution agendas, and these are a major source of political dynamism and energy for contemporary conservative politics. Greg Clark is therefore in a strong position to demand a decent spending review settlement for local government. The Chancellor would be wise to grant it.

The Department for Communities and Local Government will also press hard for increased capital spending on housing. The lack of adequate housing supply is acute and the issue will dominate next year’s London Mayoral elections. Although conservatives remain instinctively opposed to council house building, the Treasury needs to inject more resources into bricks and mortar social and affordable house building. The private sector is not building enough homes, and the government has already thrown the kitchen sink at mortgage subsidies and planning reform. More public capital is needed.

On other public services, although schools for 5-16 year olds will receive what in the Whitehall jargon is known as ‘flat cash’ for per pupil spending, it is clear that the Department for Education will be lobbying hard to extend that protection to budgets for 16-19 year olds. Faced with major cuts to adult skills budgets, and unable to charge student fees on the scale afforded to universities, sixth form and further education colleges will be pressing that case, too. The Treasury is unsympathetic, but the Chancellor may be minded to close down an exposed flank on a core public service. Science spending will need no such political defence, however: flat cash for scientific research is all but guaranteed.

The chancellor can protect these services – and make other commitments to transport investment, energy efficiency and the expansion of childcare services – while still making a surplus by the end of the Parliament, if he follows the plan set out in this week’s IPPR report on the 2015 Spending Review.  This would require him to reduce the planned surplus slightly from £10 billion to £7 billion in 2019/20, and to make some modest tax rises in line with those he announced at the Budget, such as a further increase in the insurance tax premium and more reform of pensions tax relief. Together, these changes would reduce the cuts to unprotected departments such as the Home Office to 25 per cent.

The Spending Review is also an opportunity to reform the state and to better prepare it for the 2020s. Investments in care services for children and the elderly increase the employment rate in ageing societies, boosting taxes from employment and reducing the costs of child poverty, as the Nordic countries have shown. Following this logic, spending should be shifted towards services that support full employment, higher productivity and social inclusion. This will help to constrain future increases in ameliorative social security, and improve growth prospects. The spending review should also mark another decisive shift towards decentralisation in English government – devolving power, not an axe.

With ill winds blowing across the world from Asia, renewed austerity may yet suck too much demand out of an economy that is still living off monetary life support. Public spending should be more sensitive to economic conditions, and IPPR continues to believe – like so much of the economics profession – that it is unnecessary and unwise to target a primary surplus for 2020. But even within his chosen fiscal framework, the chancellor can still make more or less progressive choices, and our report shows him how to be as progressive as possible, preparing Britain for the 2020s and smoothing his own path to power.

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