The leaked Treasury spending figures released by the Conservatives on Wednesday highlighted the extent to which spending on public services is set to be cut over coming years. Under current plans the Government would rely much more on spending cuts than tax increases to reduce public sector borrowing over the next parliament. Real total public spending is forecast to fall very slightly over the three years starting in April 2011. Spending on public services is set to fall more quickly with investment spending - that is spending on buildings and equipment - bearing the brunt. Investment spending is set to halve in cash terms over three years, as discussed in a previous IFS observation.
Alistair Darling has pointed out that current spending - that is public spending excluding investment spending - is set to continue growing in real terms by an average of 0.7% a year. But the outlook for current spending on public services is not as rosy as this suggests. The Figure below shows that once the Treasury's forecast for growth in current Annually Managed Expenditure (AME) - that is spending on items such as debt interest payments and welfare benefits - of 3.6% a year is taken into account, current spending by central Government on public services - known as current Departmental Expenditure Limits (DELs) - is to be cut in real terms by 1.9% a year. Once you add to this the large real terms to public sector investment spending, the outlook for departments is that total real terms DELs are set to be cut by 2.9% a year on average. Over three years this implies a cut in spending in 2013-14 of 8.6% compared to spending in 2010-11.
Whoever is in Government after the next election will have to decide how big the spending cuts should be and how the pain should be shared out. George Osborne has said that he would not cut spending on the NHS and that he would continue Labour's policy of large increases in overseas aid spending. This would, under the Treasury's spending plans, leave other areas of spending facing a cut of at least 13.9% by 2013-14. On Tuesday Vince Cable said that investment spending should not bear the brunt of the cuts and that no area should be spared from the pain.
If you disagree with the Treasury over how much of the reduction in borrowing should come from cuts in spending as opposed to increases in tax, or if you disagree with Mr Osborne or Mr Cable about how the pain should be shared out, you can carry out your own "Spending Review 2010" using a new tool, DIY Spending Review, that can be downloaded as an Excel spreadsheet. This enables you to set your own spending envelope and decide how the cake is shared out. A health warning for NHS managers though: Secretary of State for Health Andy Burnham said yesterday that he doesn't want you carrying out your own "mini spending reviews".