CSR: Spending Review Statement by George Osborne
Today’s the day when Britain steps back from the brink.
When we confront the bills from a decade of debt.
A day of rebuilding when we set out a four-year plan to put our public services and welfare state on a sustainable footing – for the long term.
So that they can do their job – providing for families, protecting the vulnerable and underpinning a competitive economy.
It is a hard road, but it leads to a better future.
We are going to bring the years of ever-rising borrowing to an end.
We are going to ensure, like every solvent household in the country:
* that what we buy, we can afford;
* that the bills we incur, we have the income to meet;
* and that we do not saddle our children with the interest on the interest on the interest of the debts we were not ourselves prepared to pay.
Tackling this budget deficit is unavoidable.
The decisions about how we do it are not.
There are choices. And today we make them.
Investment in the future rather than the bills of past failure. That is our choice.
We have chosen to spend on the country’s most important priorities – the health care of our people, the education of our young, our nation’s security and the infrastructure that supports our economic growth.
We have chosen to cut the waste and reform the welfare system that our country can no longer afford.
For this is the context of this Spending Review.
We have, at £109 billion pounds, the largest structural budget deficit in Europe.
This at a time when the whole world is concerned about high deficits, and our economic stability depends on allaying those concerns.
We are paying, at a rate of £120 million a day, £43 billion a year in debt interest.
This at a time when we all know that that money would far better serve the needs of own citizens than those of the foreign creditors we borrow from.
And we have inherited from the previous Government plans – if you can call them that – that envisaged our national debt ratio still rising in the year 2014.
Not a single penny of savings had been identified.
Indeed, they were plans that envisaged the Chancellor of the Exchequer standing here in 2014 presenting a spending review that still had years of cutting public spending ahead of it.
And that is why last year the IMF warned this country to accelerate the reduction in the deficit.
That is why the OECD, the Governor of the Bank of England, the CBI all agreed with them.
The action we have taken since May has taken Britain out of the financial danger zone:
* The immediate reductions to in-year spending to buy us a breathing space in the sovereign debt storm;
* The creation of an independent Office for Budget Responsibility to bring honesty back to official forecasts.
And I can confirm to the House that the OBR, and its new chair Robert Chote, have audited all of the annually managed expenditure savings in today’s statements.
The emergency Budget in June was the moment when fiscal credibility was restored.
Our market interest rates fell to near record lows.
Our country’s credit rating was affirmed.
The IMF went from issuing warnings to calling our Budget “essential”.
Now we must implement some of the key decisions required by that Budget.
To back down now and abandon our plans would be the road to economic ruin.
We will stick to the course.
We will secure our country’s stability.
We will not take Britain back to the brink of bankruptcy.
Mr Speaker, in the Budget I set out the tax increases we were prepared to make, including on capital gains at the higher rate, pension relief on the largest contributions and, for the first time, a permanent levy on banks.
We also had to increase VAT, where fortunately we were able to benefit from the preparatory work of the previous Government.
But I made it clear that spending reductions rather than tax rises needed to make up the bulk of the consolidation.
That is what the leading international evidence suggested worked best.
So I set out spending totals for the coming years, and announced some £11 billion of welfare savings that would help achieve them.
I also set out a new fiscal mandate for the public finances.
To eliminate the structural deficit by balancing the cyclically-adjusted current budget over five years, by 2015-16.
And we set a target of national debt falling as a proportion of national income by that same year.
We explained how, for reasons of caution, we will achieve both these objectives a year earlier in 2014-15.
I can confirm that the spending plans I set out today achieve a balanced structural current budget and falling national debt on that same timetable.
I can further confirm that the current spending totals I set out in the Budget for each of the next four years are the same as the current spending totals I set out today.
They have not changed.
Next year, current expenditure will be £651 billion, then £665 billion the year after, £679 billion the year after that, before reaching £693 billion in 2014-15.
The House will note that current spending is rising not falling over this period.
This is partly because, even with the measures we take today, debt interest payments continue to grow in these years.
Debt interest payments will reach £63 billion in 2014-15.
For it takes time to turn around the debt supertanker.
But I can now report to the House that against the plans we inherited, one of the departments which suffers the greatest cut today and at the steepest rate is the Department for Debt Interest.
Debt interest payments will be lower by £1 billion in 2012, then £1.8 billion in 2013 and £3 billion in 2014 – a total of £5 billion over the course of this Spending Review.
That is the equivalent to 16 new hospitals or the annual salaries of 100,000 teachers.
At the Budget I also set out my plans for capital spending over the next four years.
I can now tell the House that capital spending will be £51 billion next year, then £49 billion, then £46 billion, and £47 billion in 2014-15.
This is about £2 billion a year higher than I set out in the Budget.
Given the contractual obligations we inherited from the last Government, doing anything else would have meant cutting projects which would clearly enhance the economic infrastructure of this country.
And this has no direct impact on whether we meet the fiscal mandate or the year in which the debt ratio starts falling.
So total public expenditure – capital and current – over the coming years will be £702 billion next year, then £713 billion, £724 billion and £740 billion in 2014-15.
In real terms, public spending will be at the same level as in 2008.
Our public services and our welfare system will be put on a sustainable, long term footing.
And we will make sure that the financial catastrophe that happened under the previous Government never ever happens again.
Mr Speaker, let me turn now to the spending decisions and the three principles I propose to apply to the choices we have to make.
First, reform – that in every area where we make savings, we must leave no stone unturned in our search for waste and we must deliver changes necessary to make our public services fit for the modern age.
Second, fairness – that we are all in this together and all must make a contribution.
Fairness means creating a welfare system that helps the vulnerable, supports people into work, and is also affordable for the working families who pay for it from their taxes.
Fairness also means that across the entire deficit reduction plan, those with the broadest shoulders should bear the greatest burden. Those with the most should pay the most, including our banks.
Third, growth – that when money is short we should ruthlessly prioritise those areas of public spending which are most likely to support economic growth, including investments in our transport and green energy infrastructure, our science base and the skills and education of citizens.
Let me explain now how principles have guided our specific decisions.
First, Mr Speaker, reform.
I believe the public sector needs to change to support the aspirations and expectations of today’s population, rather than the aspirations and expectations of the 1950s.
So the Spending Review is underpinned by a far-reaching programme of public service reform.
We saw over the last decade that more money without reform was a recipe for failure.
Less money without reform would be worse.
And we are not prepared to accept that.
So we have begun by squeezing every last penny we can find out of waste and administration costs.
Our ambition in this review was to find £3 billion of savings from the administrative budgets of central government departments.
With the help of the Green Review, and the work done by my RHF the Minister for the Cabinet Office, I can tell the House that we have gone further than we thought possible in cutting back-office costs.
Quangos will be abolished.
Services will be integrated.
Assets will be sold.
And the administrative budgets of every main government department cut by a third.
The result is this.
We promised £3 billion of Whitehall savings, we will deliver £6 billion.
Of course, there is understandable concern about the reduction in the total public sector headcount that will result from the measures in the Spending Review.
We believe the best estimate remains the one set out by the independent Office for Budget Responsibility.
They have forecast a reduction in headcount of 490,000 over the Spending Review Period.
Let’s be clear. That’s over four years, not overnight.
Much of it will be achieved through natural turnover, by leaving posts unfilled as they become vacant.
Estimates suggest a turnover rate of over 8% in the public sector.
But yes, there will be some redundancies – up to the decisions of individual employers in the public sector – that is unavoidable when the country has run out of money.
We feel responsible for every individual who works for the Government, and we will always do everything we can to help them find alternative work.
In fact, in the last three months alone the economy created 1780,000 jobs.
So we should remember that unless we deal with this record budget deficit decisively many more jobs will be in danger – in both the private and the public sector.
The Cabinet Office and the Treasury will oversee the programme of Whitehall savings.
Both departments will lead by example.
The core Cabinet Office budget will be reduced by £55 million by 2014-15.
Additional allocations will be provided to fund electoral reform, support the Big Society, establish community organisers and launch the pilots for the National Citizen Service – which will give young people for the first time a right of passage to citizenship.
In recognition of the challenges faced by the voluntary and community sector, I am establishing a one year £100 million transition fund to help those facing real hardship.
The Treasury will see its overall budget reduced by 33% – and we will share the department’s enormously expensive PFI building, that my predecessor-but-one signed up to, by moving part of the Cabinet Office into the same premises.
The Chancellor is also a Royal Trustee and I want to say something briefly about the Civil List.
As I outlined at the Budget, the ten year settlement expired this year and no provision for a new settlement had been made when we entered office.
Her Majesty graciously agreed to a one year cash freeze in the Civil List for next year.
Going forward, she has also agreed that total Royal Household spending will fall by 14% in 2012-13 while grants to the Household will be frozen in cash terms.
In order to support the costs of the historic Diamond Jubilee, which the whole country is looking forward to celebrating, there will be a temporary additional facility of £1 million.
After that the Royal Household will receive a new sovereign support grant linked to a portion of the revenue of the Crown Estate, so that my successors do not have to return to the issue so often.
Mr Speaker, central to this review is reshaping our public services.
First, there needs to be a dramatic shift in the balance of power from the central to the local.
A policy of rising burdens, regulations, targets, assessments and guidance has undermined local democracy and stifled innovation.
We will completely reverse this.
We will give GPs power to buy local services, schools the freedom to reward good teachers, and communities the right to elect their police and crime commissioners.
Second, we should understand that all the services paid for by government do not have to be delivered by government.
We will expand the use of personal budgets for special education needs, children with disabilities and long term health conditions.
We will use new payment mechanisms for prisons, probation, and community health services.
And we will encourage new providers in adult social care, early years and road management.
For local government, the deficit we have inherited means an unavoidably challenging settlement.
There will be overall savings in funding to councils of 7.1% a year for four years.
But to help councils, we propose a massive devolution of financial control.
Today I can confirm that ring-fencing of all local government revenue grants will end from April next year.
The only exception will be simplified schools grants and a public health grant.
Outside of schools, police and the fire service, the number of separate core grants that go to local authorities will be reduced from over 90 to fewer than 10.
Councils and their leaders will remain accountable – but they will no longer have to report on 4,700 local area agreement targets.
The Local Government settlement includes funding for next year’s council tax freeze, to help families when their budgets too are tight.
We are also introducing Tax Increment Finance powers, allowing councils to fund key projects by borrowing against future increases in locally collected business rates.
Some in local government have concerns about the financing of social care.
I can announce that grant funding for social care will be increased by an additional £1 billion by the fourth year of the Spending Review.
And a further £1 billion for social care will be provided through the NHS to support joint working with councils – so that elderly people do not continue to fall through the crack between two systems.
That’s a total of £2 billion additional funding for social care to protect the most vulnerable.
Mr Speaker, we will also reform our social housing system.
For it is currently failing to address the needs of the country.
Over ten years, more than half a million social rented properties were lost.
Waiting lists have shot up.
Families have been unable to move.
And while a generation ago only one in ten families in social housing had no-one working, this had risen to one in three by 2008-09.
We will ensure that, in future, social housing is more flexible.
The terms for existing social tenants and their rent levels will remain unchanged, new tenants will be offered intermediate rents at around 80% of the market rent.
Alongside £4.4 billion of capital resources, this will enable us to build up to 150,000 new affordable homes over the next four years.
We will continue to improve the existing housing stock through the Decent Homes programme.
And we will reform the planning system so we put local people in charge, reduce burdens on builders and encourage more homes to be built, with a New Homes Bonus scheme.
Within an overall resource budget for the Department for Communities and Local Government that is being reduced to £1.1 billion over the period, priority will be given to protecting the Disabled Facilities Grants.
This will go alongside a £6 billion commitment over four years to the Supporting People programme, which provides help with housing costs for thousands of the most vulnerable people in our communities.
And, in recognition of the important service provided by the Fire and Rescue Service, we have decided to limit their budget reductions in return for substantial operational reform.
Security and defence
Mr Speaker, let me turn now to reforms in our security and defence.
Yesterday my RHF the Prime Minister set out the conclusions of the Strategic and Defence Review.
He explained in detail how we will protect the British people, deliver on our international obligations and secure British influence around the world.
This Spending Review provides the resources to do just that.
The budget for the Ministry of Defence will reach £33.5 billion in 2014-15, a saving of 8% over the period.
On top of this settlement, we will continue to provide out of the Reserve the resources that our forces in Afghanistan require.
As a Chancellor I believe strongly that if we ask our brave service men and women to risk their lives on our behalf in active combat, then we will give them all the tools they need to finish the job.
But Mr Speaker, our international influence and our commitment to the world are not only determined by our military capabilities.
Our diplomacy and development policy matter too.
Savings of 24% in the Foreign and Commonwealth Office budget will be achieved over the review period by a sharp reduction in the number of Whitehall-based diplomats and back office functions.
There will be a focus on helping British companies win exports and secure jobs at home, and with the help of the UKTI we will attract significant overseas investment to our shores.
I can also confirm that this Coalition Government will be the first British government in history, and the first major country in the world, to honour the United Nations commitment on international aid.
The Department for International Development’s budget will rise to £11.5 billion over the next four years.
Overseas development will reach 0.7% of national income in 2013.
This will halve the number of deaths caused by malaria.
It will save the lives of 50,000 women in pregnancy and 250,000 newborn babies.
Whether working behind the counter of a charity shop, or volunteering abroad, or contributing taxes to our aid budget, Britons can hold their heads up high and say – even in these difficult times, we will honour the promise we make to the very poorest in our world.
Our aid budget allows Britain to lead in the world.
It may be protected from cuts but not from scrutiny.
I have agreed with my RHF the Development Secretary a plan of reform that reduces administration costs to half the global donor average, ends the aid programmes we inherited in China and Russia, focuses on conflict resolution, and creates an independent commission to assess the impact of the money we commit.
Mr Speaker, let me now turn to security at home.
Protecting the citizen is a primary duty of government.
Our police put themselves in harm’s way to make the rest of us safe – and we owe them our gratitude.
But no public service can be immune from reform.
Her Majesty’s Inspector of Constabulary found in his recent report that significant savings could be made to police budgets without affecting the quality of front line policing.
And Tom Winsor is leading a review of terms and conditions which will report on how the police service can manage its resources to serve the public even more cost-effectively.
Using independent forecasts for the precept, the settlement I am proposing today will see police spending falling by 4% each year.
By cutting costs and scrapping bureaucracy we are saving hundreds of thousands of man hours – our aim is to avoid any reduction in the visibility and availability of police in our streets.
Our new National Security Strategy judges terrorism to be one of the highest risks facing this country.
Therefore I am prioritising counter terrorism over the review period, both in the Home Office Budget and the Single Intelligence Account.
We have been assured this will maintain our operational capabilities against both Al Qaida and its affiliates and against Northern Irish terrorist threats.
This will enable us to meet the terrorist threat and protect the Olympic Games in 2012.
Overall, the Home Office budget will find savings of an average of 6% a year.
The Ministry of Justice’s budget will reach £7 billion by the end of the four year period – with average savings of 6% a year.
A Green Paper will set out proposals to reform sentencing, intervene earlier to give treatment to mentally ill offenders, and use voluntary and private providers to reduce reoffending.
£1.3 billion of capital will also be provided over the period to maintain the existing prison estate and fund essential new-build projects – but plans for a new fifteen hundred place prison will be deferred.
The Law Officers Department will reduce its budget by a total of 24% over the period, with the Crown Prosecution Service greatly reducing its inflated cost base.
Reforms will also be required to streamline the criminal justice system, close under-used courts and reduce the legal aid bill.
We need fair access to justice, but provided at a fair cost for the taxpayer.
Mr Speaker, all the reforms I have spoken of – to Whitehall and the way services are provided, to local government, to our defence and security and justice system – will improve both the value for money for taxpayers and the service provided to the public.
Next month, each government department will publish a business plan setting out its reform plans for the next four years – so their priorities are clear and the public can hold them to account.
Reform is one of the guiding principles of this Spending Review.
So too is fairness.
Let’s be clear.
There is nothing fair about running huge budget deficits, and burdening future generations with the debts we ourselves are not prepared to pay.
How ironic that it was the last Labour Prime Minister himself who once observed that the “public finances must be sustainable over the long term. If they are not then it is the poor … that will suffer most.
That’s why we are restoring order to our public finances before that is allowed to happen.
A fair government deals with the deficit decisively.
That is what we are doing today.
And a fair government makes sure that those with the broadest shoulders bear the greatest burden.
The distributional analysis published today shows that those on the highest incomes will contribute more towards this entire fiscal consolidation, not just in cash terms, but also as a proportion of their income and consumption of public services combined.
Mr Speaker, I completely understand the public’s anger that the banks that were so appalling regulated over the last decade, and whose near collapse wrought such damage on the economy, should now be contemplating paying high bonuses.
We are overhauling the system of regulation we inherited so that the Bank of England, with its clout and reputation, is put in charge.
We have set up the Independent Commission on Banking to look at the structure of the industry – and next year we will receive its report.
And today we set out very clearly, for all to take note of, our objective in taxing the banking industry going forward.
We neither want to let banks off making their fair contribution, nor do we want to drive them abroad.
Many hundreds of thousands of jobs across the whole United Kingdom depend on Britain being a competitive place for financial services.
Our aim will be to extract the maximum sustainable tax revenues from financial services.
We will assess what those maximum revenues could be – not just in one year, but over a period of years.
We have already decided – in the face of opposition from the previous government – to introduce a permanent levy on banks.
The legislation will be published tomorrow.
Once fully effective, the permanent levy will raise more net each year and every year for the Exchequer than the one-year bonus tax did last year – and I note that the previous Chancellor now admits that it failed to curb behaviour and was not sustainable.
However, that is not enough.
We want the banks to pay not just by the letter of the tax law, but by its spirit.
A year ago, the previous government announced in a fanfare that it would require banks to sign up by the Code of Practice on Taxation.
Mr Speaker, I have asked the Revenue how many of our leading 15 banks actually signed up.
The answer is four. Four out of fifteen.
That’s what happened when they were in office. All talk and no action.
So I have instructed the Revenue to work with the banking sector to ensure the remaining banks have implemented the Code of Practice by the end of next month.
We will also need to address the situation under the last government where the gap between the taxes owed and the taxes paid grew considerably.
So in this Spending Review, while the HM Revenue & Customs budget will be expected to find resource savings of 15% through the better use of new technology, greater efficiency and better IT contracts – we will be spending £900 million more on targeting tax evasion and fraud.
This additional £900 million is expected to help us collect a missing £7 billion in tax revenues.
Nor will fraud in the welfare system be tolerated anymore.
We estimate that £5 billion is being lost this way each year.
£5 billion that others have to work long hours to pay in their taxes.
This week we published our plans to step up the fight to catch benefit cheats, and to deploy uncompromising penalties when they are.
That brings me to the wider welfare budget.
A civilised country provides for families, protects the most vulnerable, helps those who look for work, and supports those in retirement.
That is why one of the first acts of this Coalition Government was to re-link the basic state pension to earnings, and guarantee a rise each year by earnings, inflation or 2.5% – whichever was higher.
Never again will those who worked hard all their lives be insulted with a state pension increase of just 75 pence.
But this guarantee of a decent income in retirement has to be paid for at a time when people are living much longer than anyone predicted.
We should celebrate that fact, but also confront it.
Lord Turner’s Report on pensions, commissioned by the last government, acknowledged that a more generous state pension had to be funded by an increase in the pension age.
Even since its publication, life expectancy has risen further than it predicted.
Before the summer, we launched a review on increasing the state pension age, and that has now concluded.
As a result, I can today announce that the state pension age for men and women will reach 66 by the year 2020.
This will involve a gradual increase in the State Pension Age from 65 to 66, starting in 2018.
And it will mean an acceleration of the increase in the female pension age already underway since this April.
From 2016 the rate of increase will be three months in every four rather than the current plan of one month in every two.
Raising the State Pension Age is what many countries are now doing, and will by the end of the next Parliament save over £5 billion a year – money which will be used to provide a more generous basic state pension as we manage demographic pressures.
Earlier this month, we also received the interim report from John Hutton’s Public Service Pension Commission.
I am sure the whole House will want to thank John for this excellent and independent piece of work.
I welcome his findings – and I hope it will form the basis of a new deal, that balances the legitimate expectations of hard working public servants for a decent income in retirement with the equally legitimate demands of hard-working taxpayers that they do not pay unfairly for it.
The elements of this new pension deal are clear.
We should accept that public service pensions continue to provide a form of defined benefit, and that there is no race to the bottom of pension provision.
We want public service pensions to be a gold standard.
At the same time, we should accept that they must be affordable.
When these public service pension schemes were established in the 1950s, taxpayers made half the contributions.
Today they make up two-thirds of contributions, and the unfunded bill is set to rise to £33 billion by 2015-16.
So I think we should accept, as John Hutton does, that there has to be an increase in employee contributions, although I also agree with John that this should be staggered and progressive.
That means the lower paid – and those in the armed forces – are protected and the highest paid public servants, who get the largest benefits, pay the highest contributions.
We will await the full Commission Report next spring before coming to any conclusions on the exact nature of the defined benefit and progressive contribution rise.
We will also launch a consultation on the Fair Deal policy.
But we will carry out, as the interim report suggests, a full public consultation now on the appropriate discount rate used to set contributions to these pensions.
From the perspective of filling the hole in the public finances, we will seek changes that deliver an additional £1.8 billion of savings per year in the cost of public service pensions by 2014-15 – over and above the plans left to us by the last government.
It is also clear that the current final-salary pension terms for MPs are not sustainable and we anticipate that the current scheme will have to end.
We will make a further statement following the publication of Lord Huttons’ findings.
The welfare system is also there to help people of a working age when they lose their job, have a disability, start a family and need help with low pay.
But the truth – as everyone knows – is that the welfare system is failing many millions of our fellow citizens.
People find themselves trapped in an incomprehensible out-of-work benefit system for their entire lifetimes, because it simply does not pay to work.
This robs them of their aspirations and opportunities.
And it costs the rest of the country a fortune.
Welfare spending now accounts for one third of all public spending.
Benefit bills have soared by 45% under the previous government.
In some cases, the benefit bill of a single out-of-work family have amounted to the tax bills of 16 working families put together.
This is totally unsustainable and unfair.
The last government