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Council tax and rates may help councils escape 27% drop in central grant

Unprotected departments face an average funding cut of around 27% by the end of this Parliament, the Institute of Fiscal Studies (IFS) has warned.

In an outlook report for the upcoming Spending Review, the think tank found that plans to eliminate the deficit set out by chancellor George Osborne in the July Budget meant overall cuts of 3.2% (£11.3bn). Capital spending is set to increase by almost 11.5% (£5bn) while day-to-day resource spending is planned to be slashed by 5.1% (£16.2bn).

But once the ring-fenced departments are considered – the NHS, the Ministry of Defence and official development assistance, as well as frozen school spending – other unprotected departmental resource spending would need to be cut by almost 19% (£23.7bn).

After also taking into account cash set to be devolved through block grants to Scotland, Wales and Northern Ireland, other Whitehall departments would be at risk of 27% cuts to their budgets. Over the period from 2010-11 to 2019-20, this would mean resource spending cuts of around 50%.

The paper said: “A key question remains about whether or not spending cuts of this magnitude, on top of those delivered over the last Parliament, are achievable. On the one hand, the coalition government demonstrated the ability to hold down spending, with many departments actually underspending their allocated budgets over the last Parliament.

“On the other hand, further spending cuts (particularly with many of the same departments potentially seeing the biggest cuts again) will get harder as, presumably, easy efficiency savings have been identified and delivered, while demand and wage pressures continue to increase.”

Local government

The report defined total public spending as made of two components: departmental expenditure limits (DEL) and annually managed expenditure (AME). DEL – now “just under half” of total public spending – is allocated to departments to spend on administration and public services in Spending Reviews. AME is spending considered “harder to control” as it is demand-led, such as welfare spending and debt interest payments.

And according to the paper, local government grants would see the harshest change in budgeting, ahead of other departments at 27.2%. When considering cuts since 2010-11, this figure jumps to 64.3%.

But the report stressed that, in spite of cuts, the DEL grant to local authorities is only one resource of revenue for them. Councils also raise money from council tax and business rates – sources which are expected to rise in real terms over the Parliament, according to the Office for Budget Responsibility.

The paper added: “Taking into account this revenue, the spending power of local authorities under the scenario presented above would be cut by substantially less than the 27.2% cut to local government DEL.”

But Ian Thomas, chair of the Association of Directors of Children’s Services, said: “Up to two-third of all local government funding comes from central government grants so it is not an exaggeration to say that we are concerned about whether essential services are going to be adequately funded in the future.

“Our members and their local authorities have worked hard to minimise the impact of reduced resources and increased demand on the vulnerable children, young people and families that we serve, but it is now all too visible that the system is approaching the limits of capacity to continue to absorb such pressures.

“In order for local authorities to continue to improve outcomes for the most vulnerable in our communities, government must recognise that the current picture is one that cannot be sustained.”

And Rowena Crawford, one of the authors of the IFS report and senior research economist, said: “This Parliament will be one of continued belt tightening for many government departments.

“We already know there will be significant, further spending cuts: the chancellor has asked unprotected departments to model cuts to day-to-day spending of 25% and 40% over the next four years.

“What remains to be seen is which department he decides must deliver these cuts and what the resulting impact on the quality of public services will be.”

The LGA has also previously warned that the Spending Review will pile an extra £10bn of pressure onto councils and local services.