The chancellor’s choices: How to make the spending review as progressive as possible while still delivering a surplus

The chancellor made clear in the July budget that he wanted to make progressive choices in the 2015 spending review. This report shows, through detailed analysis of the figures, that he could choose to protect social care, expand free childcare, protect education for 16–19-year-olds, support young people into work, and invest in housing, science, energy efficiency and the northern powerhouse – while still reaching a surplus in 2019/20.

The report also demonstrates that the chancellor could choose to avoid destructive 40 per cent cuts to other public services, such as the police and the courts, by doing two things. First, he could target a slightly lower surplus than the £10 billion he is currently aiming for in 2019/20. Second, he could make modest extensions to three of the tax changes he announced at the July budget: slightly reducing tax relief for the pensions of the richest; aligning capital gains tax for high earners with the new dividend tax rate; and bringing the insurance premium tax closer to the rate of VAT.

The recommendations presented in this report would, if adopted, make government spending more preventative, integrated and devolved, while boosting employment and economic growth. They would also, crucially, leave the UK as well prepared as possible (within the constraints of the government’s fiscal rules) for the economic, demographic and social challenges of the 2020s.

While IPPR does not agree with the rate of spending reduction planned in this parliament, and would prefer a deficit reduction programme that is more responsive to the wider economy and operates over a longer time-horizon, the recommendations presented in this report are nevertheless consistent with the government’s fiscal mandate.

The fully costed recommendations in the report include:

• holding funding constant for the revenue support grant, the public health grant and the Better Care Fund in cash terms, to relieve the pressure that the underfunding of social care is placing on the NHS, and to ensure that rising demands on the care system do not cut too deeply into funding for other local government services
• introducing an entitlement to 15 hours of holiday childcare for an additional 10 weeks of the year, targeted at 2–4-year-olds in families that fall within the poorest 40 per cent of the income distribution, to support employment and improve families' finances
• protecting 16–19 education on a flat cash-per-pupil basis, to better support school-to-work transitions
• guaranteeing a job for six months, paid at the minimum wage, for all under-25s who have claimed jobseeker’s allowance for more than nine months, to combat youth unemployment and improve skills
• establishing a 'troubled lives' programme to join up services around severely excluded adults who use both homelessness and drug and alcohol services, and to act as an exemplar of service integration
• tripling the budget of the Homes and Communities Agency, with the aim of grant-funding the building of approximately 50,000 social rent homes per year, to reduce the housing benefit bill and help solve the housing crisis
• financing the ‘One North’ package of integrated investment in road and rail capacity in the north of England, to put it on course for completion in 2030, thereby driving economic growth
• accelerating investment in energy efficiency measures for low-income households, upgrading a third-of-a-million homes per year with the objective of upgrading all low-income households by 2030
• protecting the science budget, which is vital to UK productivity, economic growth and research and development, in flat cash terms.

Once the difficult task of eliminating the deficit is complete, the settlement outlined in this report can be built upon to prepare the UK for the economic, demographic and social challenges of the 2020s.