Spending Review 2015 – Deloitte preview
19 November 2015
Ahead of the 2015 Spending Review on Wednesday 25 November, partners from Deloitte - covering public finances, public service reform, local government, infrastructure, defence, policing, education and health and social care - set out their thoughts on the priorities and challenges for UK public finances and public services.
Ian Stewart, chief economist at Deloitte, said:
“This year’s Autumn Statement and Spending Review marks the halfway point in a ten year campaign to eliminate Britain’s budget deficit. Just under half of the cuts in public spending needed to balance the books have taken place, leaving much of the hard grind of deficit reduction ahead.
“The UK’s budget deficit, though down from its peak, remains high by historic and international standards. IMF data show the UK’s deficit this year, expressed as a share of GDP, exceeding countries such as the US, Germany, Canada and Australia, but also the previously recession-stricken economies of Greece, Italy, Ireland and Portugal.
“In identifying where the axe will fall in this Parliament, the Chancellor’s room for manoeuvre is severely limited by existing commitments. The government has ring fenced around 60% of day-to-day spending, pledging to increase spending in real terms on investment, health, defence and overseas aid and maintain spending on schools throughout this Parliament.
“These commitments leave a handful of areas of spending most exposed to further cuts, with local government, the Home Office, Justice and Business in the firing line.
“The good news for the Chancellor is that domestic demand remains robust and tax receipts are on an improving trend. Eliminating the deficit requires steadfastness in squeezing spending, reforms to public services and a continued recovery in the private sector.”
Mike Turley, UK and Global head of public sector at Deloitte, said:
“The 2015 Spending Review needs to set out how the next phase of austerity will be delivered. Public bodies largely absorbed the cuts of the last Parliament internally, through pay freezes, redundancies and sharing back offices. These were the ‘easier’ cuts and polls suggest the public have been more relaxed about these. But the UK is set to fall from 16th in the IMF’s rankings of national public spending in 2010 to 26th in 2020. This could be the stage people start seeing big differences in their public services.
“With cuts continuing at the same rate as the last Parliament, we need to see a fundamental redesign of public service delivery. This will need a greater role for technology and digital services, public sector productivity improvement and tough decisions about what the state can, and cannot, continue to provide. With the state shrinking, we also need a public sector that attracts and retains the best people and the right skills. The squeeze on pay and promotion makes this particularly difficult.
“Like the wider economy, boosting public sector productivity is essential. Deloitte has calculated that freeing up just one hour of public sector workers’ time through improved productivity can save £72 million each year. This is not about forcing public servants to work harder or longer, it is about helping them work smarter with better technology, removing overlaps and repetition in delivery and re-designing services to focus on citizens’ needs and what is proven to work.
“Government should also be thinking about the impact of automation on public sector roles. Deloitte research has found that a number of public sector jobs, including traffic wardens, librarians and administrative staff, are at high risk of automation over the next two decades. Automation can improve the speed and efficiency of tasks and play a role in sustainably reducing public sector headcount.
“Financial distress could also come to the fore in this Parliament. There are warning signs from watchdogs and regulators and Deloitte have estimated that over 200 frontline public sector organisations could require intervention in the next five years. Half of these are NHS trusts but we can also see distress signals in local government, police and further education. Some will need support from other organisations in their sector, others direct financial assistance from government. The government must be clear on the risk of failure in the public sector and plan how to intervene and rationalise organisations in a coherent manner.
“Beyond deficit reduction, the large level of debt on the UK’s balance sheet – currently £23,428 per UK resident – needs addressing. This is a burden on the taxpayer and future generations and leaves the UK at risk from further financial crises and interest rate changes. Already we spend more on debt interest than policing and criminal justice and, if debt rises at the same rate without action, by 2034 we would spend more on servicing debt than all public services. Policy decisions must be taken with a view on how they impact on the government balance sheet in years to come.”
Nick Prior, Global Head of Infrastructure at Deloitte, said:
“With the Conservatives’ manifesto committing to invest £100 billion in infrastructure during this Parliament, and the UK languishing in mid-table on its rankings for quality of infrastructure and productivity, infrastructure has been trailed to be at the heart of this Spending Review.
“Most likely this will be in the form of investment in housing, roads, rail and nuclear energy, as well as the Northern Powerhouse.
“More clarity on the powers and role of the National Infrastructure Commission as well as the share of the £100bn commitment the private sector is to be asked to contribute, would both be welcome. It will also be important to get assurances that the newly constituted Infrastructure and Projects Authority will retain the level of impact in the development of infrastructure that Infrastructure UK had established. The move from HM Treasury to the Cabinet Office is not encouraging as the real power lies where the money is allocated.
“The challenge will lie in finding funds to kick-start infrastructure projects when large spending departments are being asked to realise significant budget savings. We are expecting the reinvigoration of the role of private finance in this Spending Review. The ‘PF2’ model was launched in the last Parliament but has been little-used. The hesitance of politicians and civil servants around private finance would have to be overcome but the reality is that, for departments looking to deliver capital projects, private finance might now be the only game in town.”
James Taylor, lead policing partner at Deloitte, said:
“The Spending Review presents some police forces with double challenge of potential cuts to Home Office spending and changes to the Police Funding Formula. On top of the costs already taken out of policing, this will likely add to the concerns some forces have expressed about their future financial viability.
“But all forces will need to look at fundamentally transforming the way they police in future. Police forces will have to look at managing demand on their services, through technology and greater citizen involvement. This may require some investment and changing established cultures in policing.
“Forces will also have to look at how they can better join up with other local public services, such as local authorities, health and social care, to share resources and alleviate pressures.”
Ian Washington, lead local government partner at Deloitte, said:
“Throughout the austerity years, many leaders of local authorities and local public services have spoken with pride about making their organisations fitter, leaner and more focused. This hasn’t been easy.
Redundancies, pay freezes and limited promotion opportunities have hit morale and local public services say the need to keep talented and skilled staff is greater than ever.
“But larger challenges lie ahead. After five years of cutting costs, fundamentally redesigning operations and rethinking how services are delivered will dominate the next five years. By 2020, many local public service leaders expect to have retrenched into core, statutory activities with a broader mix of providers and more collaborative working with other public bodies.
“Local government needs to reset the long-standing, historic expectations on what it delivers and focus greater attention on enabling citizen, family and community resilience. This will require an honest conversation with the public and political leaders about what local public services can, and cannot, continue to do.
“Combining local authorities could well be a way to find savings. But with localism high on the political agenda there would need to be a balance between joining up local authorities and devolving more powers to the local level, with the level of integration going much wider and deeper than many are currently planning.”
Simon Dixon, lead transport partner at Deloitte, said:
“A reduction of 30% in funding over the course of this Parliament will require a rethink about the size and scope of the UK’s transport decision-making bodies, particularly as power is pushed out to devolved regions and arms-length bodies.
“Giving extra transport powers to regions and cities is welcome but the challenge lies in ensuring that they can make decisions on local issues that are consistent with a joined-up, national transport system.
“With operating funding decreasing, transport bodies may need to look at generating additional income, including the commercialisation of their assets, sponsorship, retail and property ties ups and disposals. This requires thinking differently, new ways of working and a shift in culture and skills. This is likely to be the case in London, with TfL facing the loss of its central government grant. That said, TfL is an example to follow in being innovative in raising additional income.
“In the years to come, road charging may come back on the agenda as a means of funding. There are political obstacles but it would ensure those who use UK roads the most make the largest contribution to their development and upkeep.”
Duncan Farrow-Smith, defence partner at Deloitte, said:
“The Strategic Defence and Security Review on 23 November will have to balance the need to invest in key areas, build and keep the right skills and deliver on big projects, all while finding considerable savings.
“The UK defence budget has been protected with a pledge to increase spending by 0.5% in real terms over the course of the Parliament, an extra £1.5 billion per year for intelligence spending and the NATO commitment to spend 2% of GDP on defence. But defence still faces a number of financial and skills challenges, even with this more favourable funding arrangement.
“Cuts are planned in the number of frontline service personnel in the Army, Air Force and Navy by 2020. Even with commitment not to reduce numbers any further, consideration needs to be given to ensuring the armed forces have the right people and expertise for the roles they are likely to play in the coming years.
“Behind the frontline, new models of delivery, sharing services across the public sector and, where needed, outsourcing to the private sector may be needed to cut costs and maintain support services.
“There are big spending decisions ahead for UK defence - new aircraft carriers, aircraft and the thorny issue of the UK nuclear deterrent. In addition to the funds needed for these, with public sector pay under pressure, ensuring the skills and expertise are in place to deliver these will be a particular challenge.”
Health and Social Care
Rebecca George, lead public health partner at Deloitte, said:
“With ever-growing demand and increased financial constraints, the NHS is facing unprecedented challenges. Funding has been ring-fenced, with year-on-year increases of around one per cent, but demand has been growing between four to five per cent a year. Already, NHS trusts are reporting a £930 million overspend in the first quarter of 2015-16 alone.
“The NHS is increasingly being affected by cuts in social care and shortages of GPs, primary and community care nurses, and emergency care staff, leading to reliance on expensive agency staff. The increasing volume and complexity of demand from an ageing population, at one end of the spectrum, and an increase in birth rates at the other are also putting pressure on resources.
“In the first five years of austerity, the NHS managed to largely balance its books through pay restraint, controlling spend on consumables, improving procurement, cutting central budgets and abolishing some tiers of management. The next stage for the NHS will require smarter ways of working and new technology, but these will both need time and upfront investment.”
Julie Mercer, UK and Global industry leader for education at Deloitte, said:
“Although parts of education spending, such as the schools budget, have been largely protected there have been significant changes to further and higher education funding. These throw up new challenges at a time when the environment schools and universities operate in is becoming more competitive. Across education as a whole we will need systematic restructuring to balance the books and put universities, colleges and schools on a sustainable footing.
“Investment in higher education has been strong but there are signs from our research that this looks to be cooling off. The cost of delivering higher education is increasing and reserves are being stretched. Demographics could see fewer UK applicants in coming years and universities are also having trouble recruiting international students, with numbers falling in the UK compared to countries such as the USA. Higher education is a £10.7 billion export business for the UK and its position must be maintained.
“In further education, there are already signals of financial distress ahead. Large scale reform of the sector will be needed to revisit how it is funded, governed and organised and, by 2020, we can expect to see fewer large FE colleges.
“Similarly in schools, fewer large multi-academy chains could feature in future and the sector will need more skilled professionals to manage in what is becoming an increasingly complex financial and regulatory environment.”
Notes to editors
Deloitte public sector spokespeople
Deloitte will have the following public sector spokespeople available for commentary in advance and on the day of the Spending Review:
- Mike Turley – public services and public finances
- Rebecca George and Karen Taylor – health and social care
- Julie Mercer - education
- Ian Washington – local government
- James Taylor - policing
- Duncan Farrow-Smith - defence
- Victoria Smith – public sector property
- Simon Dixon – transport
- Joel Bellman – digital public services
- Nick Prior – infrastructure
To speak to any of Deloitte’ team in advance or on the day, please contact Mark Smith on 020 7007 7082 or 07590 041 301
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