Budget 2016: the pressure is on for public services

The government will have to work hard to deliver services in a cold climate.

While the headlines are about sugar and young people, the Budget has serious implications for public services.

The second half of a decade of austerity, announced in the November Spending Review, was based upon some hopes for public spending and revenue that have turned out – a mere four months later – to be misplaced. To fill the gap the Chancellor yesterday increased taxes on big business and cut spending further. The largest of these cuts relates to Personal Independence Payments to disabled people. But there were further large cuts that affect public services hidden in the small print of the Budget.

The first of these was the Chancellor’s early announcement of the next spending review in 2018. While the 2015 Spending Review was supposed to cover five years, the later years were always sketchy. Departments’ day-to-day spending (known as RDEL) was due to fall steeply until 2019-20 and then increase in 2020-21. In order to meet his fiscal rules the Chancellor has said that this increase will no longer happen – the 2018 efficiency review will take another £3.5bn out of spending.

The second big change is that public sector employers will have to increase their pension contributions by £2bn following an increase in the “discount rate” (the interest rate assumption used to assess pension liabilities) for public sector pension schemes. While it’s a good idea to make sure that the public sector can meet its pension liabilities, there were ways of making this change that would not have cost large public sector employers, like the NHS, so dearly. This change comes on top of the increase in the minimum wage which will progressively hit public sector budgets through this decade – so while headline spending for the NHS is going up, in reality much of the increase will be eaten up by the increasing cost of employing people. For other parts of the public sector, the costs of employing people will fall on budgets that have already been cut.

A third change looks minor and technical but could have big implications for the government’s capacity to manage: public sector employers must now tax people contracted through personal service companies as normal employees. This will affect contractors in several areas of the public sector, but primarily those with digital skills, often at a senior level and with skills that are hard to retain in the public sector (such as enterprise architecture). From the perspective of making sure the tax burden is fairly shared, this seems fair enough. From the perspective of the gap between the government’s massive digital ambitions and its capability, this has potentially difficult consequences.

The Budget needs to be seen in the context of the Chancellor’s statement that the government needed to do “more with less”. It was never clear where “more” would come from.

Faced with less money, sensible organisations prioritise and say which activities they will stop. Instead the Budget added eye-catching major projects, such as railways and flood defences – while continuing eat away at its capacity to implement its ambitions. The Government has decided that there will be less money for public services, but it still needs to work out how it will manage with less.

Daniel Thornton is programme director at the Institute for Government.