Government spending review – what it means, and why portfolio decisions are more important than ever

Government departments are set to lose £4 trillion in funding over the current period of parliament – how can those savings be found?

With government spending expected to reach almost £750 billion this financial year, and £4 trillion over the next four years[1], the Chancellor sees making savings in central government spending as critical in moving the government’s budget from deficit into surplus. This year’s comprehensive spending review sets out public sector budgets from April 2016 to March 2020, with Osborne aiming to reduce government spending by £16-20bn over the next four years.

Who and what is affected by the Spending Review?

The spending review, which will be published in full on November 25 2015, was announced in July. The Treasury, Transport, Environment, and Communities and Local Government departments, were the first to agree to decreases of c.30% to their budgets[2], which will involve budgetary reductions of c.8% every year, for the next four years.

Settlements for all other impacted departments have now been agreed[3], though not yet published in full. As individual departments proposed plans to the Chancellor independently, the possible benefits of a more collaborative approach which strategically examined overall resource allocation, were not realised. This may have caused competition between departments over scarce resources, and led to decisions being made without full transparency.

What's considered out-of-scope?

In addition, there are also protected departments, with ring-fenced budgets[4]. These include Health, Defence, and International Development, as well as spending on pensions, school-aged pupils and prisoner benefits. These spending commitments cover more than 50% of public spending. Not only do some departments face no reductions, but some are additionally asking for increases to their budgets, further decreasing the resources available elsewhere in government.

It’s important to note that capital spending will not be affected. This is in fact due to rise, to as much as £100bn over the next 5 years[5], making reductions elsewhere yet more necessary to enable an increase in spending on investment in infrastructure. 

So where can these savings be found?

The Chancellor has said[6] that he expects savings to be achieved “by a combination of further efficiencies in departments, closing low-value programmes, and focusing on our priorities as a country”.

However, this spending review follows five years of austerity measures, during which time some departments have seen their budgets halved. Low hanging fruit have already been targeted. For instance, over the last five years, £1.7bn has been generated from asset sales[7], as government estate has been reduced by two million square metres. With government departments now asked to find further savings of between 25-40%, these may not all be found in simple efficiencies or asset disposal. Instead, front-line services that the public take for granted may change drastically. Transformational approaches to service delivery will be required.

This means that public sector organisations will have to radically transform their operating models to reduce cost whilst maintaining or improving customer service. To achieve this, government departments should analyse and prioritise their current portfolio of projects and services, assessing which offer value-for-money and are most beneficial to the general public. They will need to find new ways to interact with service users to fully understand the voice of the customer and the value of their service offerings, and to prioritise resources using this strategic knowledge.

The full results of the spending review will be available on 25 November 2015, but whilst departments are negotiating their settlements now, it may take more time to pinpoint exactly where these savings will come from. Decisions about where to focus limited resources should not be made in separate siloes, nor at speed. Departments must work with each other, and consult with impacted service users, to ensure that they protect services which offer long-term value, and provide them in the most cost-efficient way possible. Taking a portfolio approach will help ensure that the best decisions are made.

[1] https://www.gov.uk/government/speeches/george-osborne-sets-out-his-priorities-for-the-spending-review

[2] http://www.bbc.co.uk/news/uk-34763261

[3] http://www.bbc.co.uk/news/uk-politics-34790102

[4] http://www.theguardian.com/public-leaders-network/2015/nov/06/2015-comprehensive-spending-review-public-services

[5] http://www.theweek.co.uk/autumn-statement-2015/64483/autumn-statement-2015-osborne-hints-that-surplus-target-may-fall

[6] https://www.gov.uk/government/speeches/george-osborne-sets-out-his-priorities-for-the-spending-review

[7] http://www.express.co.uk/news/uk/592511/Public-spending-cuts-George-Osborne-Greg-Hands-austerity

Media Enquiries
For more information please email info@moorhouseconsulting.com