The unsubtle knife

IT DOES not sound very austere. By 2020 spending by the British government is likely to be slightly lower in inflation-adjusted terms—perhaps 1%—than in 2010, when the Conservatives came to power. “I don’t think there’s a family or business that couldn’t do that—and I don’t think government…should be any different,” David Cameron, the prime minister, has said.

In reality things are tougher. Under plans outlined by George Osborne, the chancellor, on November 25th, Britain will see a decade-long pause in public-spending growth, the longest-running squeeze on Leviathan since the 1950s. Spending will fall from 45% of GDP in 2010 to 36% in 2020, the biggest tightening by any big, rich economy over that period. What does all this mean for the British state?

Mr Osborne was helped by new forecasts from the Office for Budget Responsibility, a government watchdog, which suggested that higher tax revenues would give him £27 billion ($41 billion) more to spend than previously thought. The chancellor used this wriggle room to cancel proposed cuts to tax credits, wage top-ups for the working poor, whose axing had proved controversial. Tax credits are to be phased out anyway as part of an overhaul of welfare; nonetheless, the screeching U-turn provided most of the next day’s headlines.

Beneath that announcement, bigger changes to the shape of the state were afoot. To Conservative cheers, the chancellor pledged to maintain spending on defence and foreign aid, and made much more costly promises to protect pensions and the schools budget. Funding for the National Health Service (NHS), which eats up one-third of departmental spending, will rise by £10 billion in real terms by 2020. A few large ringfenced budgets will end up forming a much bigger slice of the spending pie (see chart).

Pensioners have every reason to be delighted: the state pension will increase by 2.9% from April 2016 at a time when prices are falling. But the young are not doing as well as it seems. By 2025 the number of people aged 14 and under will have increased by 7%. Schools will face rising costs, thanks in part to their need to make higher pension contributions. The Institute for Fiscal Studies (IFS), a think-tank, reckons that school spending per pupil is likely to fall by 8% in real terms in 2015-20.

It is a similar story in health care. The elderly are expensive to look after—and the very elderly are very expensive indeed. An 85-year-old receives five times as much NHS spending as a 40-year-old, and double that of a 70-year-old. This matters because, according to the King’s Fund, a think-tank, the number of over-85s will roughly double by 2032, and with them the number of Alzheimer’s and cancer patients will rise.

And that’s the good news

After adjusting for an ageing population, per-person spending on the NHS in England has fallen since 2010 and is likely now to stagnate, says Mark Dayan of the Nuffield Trust think-tank. “The NHS will still be run on a tight budget by the standards of the developed world,” he says.

Departments not protected by Mr Osborne currently account for only around one-third of departmental spending. Having fallen by 20% in the previous parliament, their budgets will shrink by a similar proportion by 2020. There is some fat to trim. Officials in local government talk of having stopped juicy donations to charities that just so happened to be political allies of their predecessors. A report on the Foreign Office, which saw its day-to-day budget cut by one-quarter in 2010-15 (but was spared this time), found that “residential premises for most…staff overseas are likely to be humbler”—no tragedy.

To make more such savings requires central government to make smart decisions, argues a paper by the Institute for Government. It points to the formation in 2011 of the Government Digital Service, which created Gov.uk, an easy-to-navigate website that makes it simpler to access public services. Last year the digital task-force saved the government £600m.

But large parts of the state are not looking much leaner or meaner than in 2010. One big source of inefficiency, public-sector procurement, has been left untouched. One pound in every three spent on public services goes to private firms, which if managed well provide services more cheaply than the state. But there is still no central oversight of public-service markets, the IFG says. The result is money-wasting cock-ups, as when G4S, a security firm, failed to provide the full number of guards it had been contracted to supply for the London Olympics in 2012. With the number of civil servants down by 20% since 2010, oversight will be even trickier.

Since efficiency savings are not enough, departments will have to ration services. Getting people to pay for things that were once free is one solution. The Department for Business, Innovation and Skills, facing a 20% budget cut in 2015-20 on top of a 25% cut since 2010, is squeezing university funding. Next year poor students will no longer get a grant to pay for room and board; instead they must take out a loan.

Elsewhere, in response to a budget cut of about 30% since 2010 the justice department has ordered magistrates to impose court-use charges on adult offenders. Defendants pay a lower fee if they plead guilty. All this allows public services to be maintained, while taking the cost of providing them off the books.

Even then, unprotected departments will have to cut some services altogether. Sarah Hayward, the leader of Camden council in London, says that her local authority is increasing the number of children that each social worker is expected to look after, a move which so far it has resisted. Across all local authorities, which face a 77% cut in their government grant in 2010-20 according to the Resolution Foundation, a think-tank, the number of children’s centres began to fall last year.

Cutting the supply of public services rarely quells demand for them. Nine out of ten NHS trust finance directors surveyed by the King’s Fund reckon that cuts in social-care budgets—for sheltered housing and care homes, for instance—are adversely affecting health services. In September the number of patients who should have been transferred from hospital to another form of care, but were not, was 26% higher than it was four years ago.

Mr Osborne has allowed local authorities to increase council taxes by 2% to fund extra social care; overall, that could raise £2 billion a year by 2020. Yet the poorest councils, which have the highest demand for such services, will find it most difficult to raise taxes. And even if all that were raised, it is unlikely to offset past cuts.

Mr Osborne’s promise to run an overall budget surplus by the end of the current parliament is driven by political rather than economic logic. The deadline is determined by the timing of the next election. And since the target includes investment spending, it will worsen Britain’s long-standing problem of insufficient capital spending on things like roads and railways.

The counterargument, that running a budget surplus is the only way to pay down the public debt (currently 80% of GDP), does not hold either. Britain could probably run a deficit of 2% of GDP up to 2020 and still reduce its debt ratio, since the economy is forecast to grow at a decent clip. Though Mr Osborne’s austerity plan has not been as damaging as some feared, it is causing more pain than needed.