Alex Morton is Director of Policy at the Centre for Policy Studies, and was a member of David Cameron’s Downing Street Policy Unit.
A Downing Street-dominated budget that pointed to a Downing Street-dominated Spending Review?
The first point to note about the Budget is that it was a clear reassertion of Number Ten’s dominance in economic matters. This was a Budget largely made there – particularly with regard to NHS spending and, to a lesser extent, to the raising of tax thresholds, which will help with disposable incomes, the flip side of voters’ concern about the cost of living.
Even the (fairly small) pots of money being thrown at various political pressure points, from social care to defence, can all be linked back to political and policy problems that Downing Street is grappling with.
All in all, the Budget points towards a similarly Number Ten-dominated Spending Review next year. As I’ve argued before on this site, the most likely way for the Prime Minister to cement her domestic legacy is through a review which allows her a clear period of domestic focus post-Brexit. Certainly, the details of this Budget fit that argument.
This is entirely natural. Ultimately, a Spending Review is not just about money, but about the entire direction of a country: the changes that it makes are not just about pounds and pence, but about how the Government and, to some extent, the country views itself. Spending is not just a goal in itself, but linked to the achievement of wider objectives. So, particularly in the aftermath of Brexit and with a slim effective majority (English Votes for English Laws areas aside), the Spending Review will have to bring the Conservative Party together behind a shared vision of what the country should be.
The Spending Review needs a pro-growth focus
Part of this vision must be about how we get back to higher levels of growth. The most worrying aspect of this Budget was the long-term weakness in growth, pencilled in to fluctuate in the coming years at between one per cent and 1.6 per cent. Given projected population growth of around 0.5 per cent, this means real growth on a per person basis of just one per cent.
This ‘new normal’ is not normal at all: economic expansion has not been this low since we started measuring economic growth, and the rising tide of populism is partly down to the sluggish growth in developed economies. So the Treasury should not simply accept the growth figures given by the OBR, but seek to raise them.
Even if the way that the OBR has to sign off projected growth, and any disagreement it has with more conservative pro-growth measures, mean that these cannot be banked into the forecasts on Budget day, they will none the less build in spare capacity if and when policies deliver. Without being rude to the OBR, which does a useful job analysing the figures, it is results, not forecasts, that ultimately matter, and forecasts reflect the biases of those who make them.
Without this spare capacity, we will probably come unstuck. There is always pressure to spend money at any fiscal event – and levels of spending reduction often prove harder to make than first thought. Debt is still very high as a share of GDP.
If the economy falters, political pressures rise, or departments cannot stick to their budgets, the deficit will begin to rise again. And Jeremy Corbyn will claim that this shows that the Government has failed on its own terms. The average voter has only vague awareness of these issues, but they will pick up if we allow borrowing to start rising, having promised to bring budgets into line. On top of this undoing the Party’s work in terms of the deficit, if growth does not increase, and wage growth remains low, it will fuel Labour’s claims of an economy rigged by the few against the many.
The need for further reform across government
This tight fiscal landscape also means that reform across government needs to continue. The ‘end of austerity’ must not mean an ‘end to reform’. The spending envelope set out at the Budget also means that apart from the NHS, on which spending will rise ahead of economic growth (although still at a moderate level in historical terms), other departments will essentially see flat real-terms spending.
To deliver better services for the public, ‘business as usual’ is not an option. Even those departments which see small real-terms increases are going to have to improve in order to make sure tight budgets go hand in hand with better outcomes. The Civil Service – and the usual chorus of hand-wringers in the media and the ‘third sector’ – will make out that anything other than substantial increases are impossible (the BBC, for example, is atrocious when reporting current rows about ‘school cuts’, rarely pointing out that per capita real terms school spending roughly doubled from 1999 to 2013, as the IFS notes).
Indeed, many private sector organisations cope with flat budgets in real terms year after year – and the Government must learn from them. There is plenty of scope for better government at no extra cost, but it will not happen by itself, and if we expect it to do so we will be sorely disappointed. To improve services without spending more, both individual departments and the Civil Service will have to up their game.
Forward thinking must begin now
Delivering all this on top of Brexit is a tall order. The Government needs to start thinking now – not wait until the middle of next year. There are talented people across Government, such as Liz Truss, who are never happier than thinking about how to reform Government and reduce wasteful spending. They need to be encouraged by the centre to contribute and push forward ideas.
Thus substantial parts of the Treasury and perhaps the Cabinet Office (under the watchful eye of Number Ten) also need to start thinking about these issues now, rather than once Brexit is done. This will also have the positive effect for Downing Street of helping push Cabinet Ministers to spend time on working on their department’s future strategy, rather than just focusing on Brexit.
This Number Ten-led Budget was perhaps a pointer to the nature of the next Spending Review – but a great deal of work is necessary between now and then if it is to go as well as the Budget appears to have done.