Spending Review 2013: PwC media briefing

Published at 16:34 PM on 25 June 2013

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The fiscal situation remains very challenging, with little room for the Coalition to manoeuvre in its Spending Review without incurring significant pain on unprotected department areas.  with significant further spending cuts and widespread fiscal restraint planned up to 2017/18, the pressure continues.

Uncertainty and austerity will remain watchwords for public bodies into the next Parliament.  Affordable government is the order of the day, alongside fostering the conditions for growth - with an emphasis on 'good growth' - particularly good jobs.

Key facts

  • In the forthcoming Spending Review the Government seeks to deliver another £11 billion or so of real spending cuts in 2015/16, with unprotected departments seeing real cuts of around 5%.  Cuts to departmental spending (DEL) are slowing down in the short term, but are then picking up pace again from 2015/16 onwards.
  • In the next five years we expect private sector job gains of 1.7 million to more than offset public sector job losses of just under 900,000.  Many of the jobs may be part-time or temporary employment, however, and could be at lower pay and benefit levels than the public sector jobs lost.
  • A greater number of older people continued to work, while young people have struggled to enter the labour market.
  • Some key challenges for the Coalition stand out from our public survey - support for ring-fencing of the NHS is increasing, the public’s knowledge and understanding about the deficit is decreasing.

Key stats from PwC analysis Living with Austerity

  • Since Q1 2010 the private sector has created over 1.3 million new jobs, more than offsetting the loss of around 400,000 public sector jobs during the same period.
  • Over 60,000 fewer 16-24 year olds were employed in Q1 2013 as compared to Q1 2010
  • 200,000 more over-65s were employed in Q1 2013 as compared to Q1 2010
  • 25% of UK survey respondents believe that the UK economy has got worse rather than better over the last 12 months
  • 10% think the economy will worsen over the next 12 months; 36% believe it will stay the same
  • 54% rate the health of the UK economy as ‘poor’ or ‘very poor’
  • 67% agree NHS should be exempt from further cuts
  • 54% agree schools should be exempt from further cuts
  • 15% agree that overseas aid should be exempt from cuts

Read more of PwC’s analysis:
http://www.pwc.co.uk/government-public-sector/spending-review/index.jhtml

SPENDING REVIEW OVERVIEW

Analysis by PwC ahead of the forthcoming Spending Review on 26th June suggests solid total employment growth for the next five years, and a slightly falling unemployment trend. But real wage growth is likely to remain more subdued than in past economic recoveries.

Paul Cleal, head of public sector, PwC

“The fiscal situation remains very challenging, and there is little room for manoeuvre to deliver the latest round of spending cuts without imposing significant additional pain on unprotected departmental areas. Despite an expected gradual recovery in the UK economy, it’s clear there will be significant doses of austerity extending well into the next parliament.

“There is an appetite for new ideas – the Single Local Growth Fund and Local Growth Deals, for example, aim to support regional growth and competitiveness. The Spending Review should set out more detail on these initiatives, which could represent a potentially seismic shift in the decentralisation of economic power and place more responsibility with business (through Local Enterprise Partnerships) and local authorities to deliver growth on the ground.”  

Nick Jones, director, public sector, PwC

“With slower than projected growth raising public borrowing projections significantly since June 2010, the government may have boxed itself in from future necessary changes in the big areas of spend. Strong public support for continued protection of health, pensioner benefits and schools will make it much harder for any government to argue the case for removing the ring fence in the immediate future.

“If the public doesn’t understand the reasons behind the deficit, it makes it more difficult to create support for the politically difficult choices that will have to be made. Austerity will continue well into the next parliament, so there’s work to be done on addressing not only the fiscal deficit but also the communications deficit with the public.”

CAPITAL SPENDING

John Hawksworth, chief economic advisor, PwC

“Our analysis of public finances shows that the focus of the spending cuts is now switching from capital spending, including infrastructure, to current departmental spending. Furthermore the pace of the real departmental cuts is speeding up from only around 1.2% this year to around 2.8% in 2015/16.

“Departments not protected by ring-fencing (and which have not yet settled their budgets) now face around £8.5bn in real cuts in 2015-16, equivalent to a 5% cut in real terms from their 2014-15 budgets. In the two years beyond 2015/16, the report estimates that faster cuts are implied to make up for delays in reaching the government’s fiscal targets, with real cuts in departmental spending of 3.5% - 4% per annum.”

LOCAL GOVERNMENT

Andy Ford, head of local government

“Council leaders have put their stake in the ground and said local government can’t go on bearing the brunt of the public spending cuts.  However, it is tempting to summarise the prospects for councils in the forthcoming Spending Review very simply as "more of the same". We can reasonably expect to see a shift in the narrative to support this renewed focus on savings.

“The political rhetoric to date has concentrated on perceptions of inefficiency in the sector and overpaid "town hall fat cats".  That has largely landed well with the public at large, more than half of whom have not seen much in the way of a visible diminution in the services they receive as a result. With increasing headlines about closures to swimming pools in Newcastle and reduced youth service provision in London, Ministers may well change the tone and substance of their arguments. Expect therefore to see more attention given to Community Budgets. More broadly, if Community Budgets are to really live up to their potential, they could involve dramatically rethinking existing budgets, and not just appear as rebranded cuts.”

  • In PwC’s annual Local Government survey, council chief executives’ confidence in protecting front line services from budget cuts plummeted by 40% in a year, One council leader described how “life is getting closer to the front line” and “everything is up for review”.  36% face the same level of savings target two years in a row, and 40% have even bigger targets;
  • While public understanding or perception of ‘cuts’ to date remains relatively low, of those aware of cutbacks to their local council services, or believe they have been introduced (55%), more than half (53%) oppose them, up from 36% two years ago;

INFRASTRUCTURE

Richard Abadie, partner and global head of infrastructure at PwC said:

"Through the last couple of spending reviews there have been significant policy announcements or re-announcements about capital spending.  However, the announcements have not made a significant impact on jobs and growth.  With the previous acknowledgement that capital budgets shouldn't have been cut at the very point stimulus was needed, I'm hoping for spending plans that will generate growth in construction and housing sectors.

"The construction industry has been contracting for the last six months and has only in the last month seen very marginal growth, so the money isn't finding its way into the economy.Spending that's allocated to near term infrastructure activity rather than long date ideas, has much more current benefit.

"Away from the hype of announcements, we need a more realistic portrayal of the impact of any additional infrastructure expenditure.  Decisions around the acceleration of the South-East England runway decision, commitment to spend money on affordable housing and road widening projects coming forward together with increased spending on railway infrastructure by Network Rail are all areas where progress is needed. Let's put the emphasis on expenditure in the near term to build long term economic growth."

TAX

Alex Henderson, partner, Tax

“Given that PwC projections show the scale of cuts in the two years following 2015/16 to be essentially as great as those in 2011/12 (at just over £40bn) the temptation to change the plans slightly and raise more tax will be great. Given the sums involved that could require a further adjustment to the rates of one or more of the 'big three' revenue raisers - Income tax, VAT or NIC which together make up over three quarters of the Government's tax receipts. Corporation tax the next biggest is less than a tenth and changes to more minor taxes or simple tightening of the rules, as we tend to see in each Budget, simply wouldn't be big enough to make a difference). A change to any of the big three is likely though to have a direct impact on peoples' pockets.

PRIVATISATION / SELL OFF

Paul Davies, Partner, Corporate Finance

"There has been a lot of discussion about assets and businesses that Government may sell or outsource.  For example, Government is already selling the old student loans book and the £40bn+ new student loan portfolio is likely to be an extremely attractive asset for investors; both the high credit rated part of the investment, but even some of the more challenging parts, as there is an established private sector investor base. 

“In general, privatisation, sale or outsourcing make sense where the private sector can deliver services more efficiently and with scale, where those services can clearly be defined or expanded to generate wider revenue and where, like student loans, there is an opportunity cost of Government holding on to assets that are attractive to private investors. "

EDUCATION AND SKILLS

Sara Caplan, partner, education and skills, PwC

"The ring fence for education in itself doesn't mean things have been easy for the sector. Over the last few years we've seen schools have to become more like businesses - doing more with less. That in itself is a challenge for schools, as head teachers don't always have the capacity - whether time or strategic financial planning - to do this. Even with a continued ring - fence, education faces some tough challenges to deliver more efficiently and differently to make sure we're delivering the skills and curriculum needed."

"In skills, Apprenticeships have been the most dramatic change to the skills landscape since the last Spending Review. Their profile and perception has radically changed and the government see them as a key engine for growth and productivity. From a localism point of view, the risk with the Spending Review is that it devolves too little spending and responsibility to the regions to allow them to do something significant and targeted on skills for what their area needs."

  • In a PwC survey of the public, 54% agree schools should be exempt from further cuts
  • Over 60,000 fewer 16-24 year olds were employed in Q1 2013 as compared to Q1 2010

HOUSING

Richard Parker, partner, PwC

“Given where we are on the need for cuts, a generous settlement is not expected, although there is hope for flexibility on spending. There are two issues arising. Firstly, there is the possibility of additional money becoming available by switching capital funding. Secondly, while it is not expected that Local Authority caps will be lifted, there is hope that where Local Authorities have unused borrowing headroom they might reallocate funds.”

REGIONS

Roger Marsh, senior office partner Leeds, and incoming LEP Chair of Leeds City Region said:

"If we want local economies to improve the economic well-being of the regions, we have got to give them the tools. It's about a cultural shift - 70 per cent of Government spending is controlled from the centre in the country, compared with an OECD average of 48 per cent. It is a big ask. But if we want to get the economy growing again beyond what currently seems to be the natural rate of 'flat-plus', we need to do things in a different way"

"What people in the regions are saying is give us the tools to deliver the plans we are developing, and we will go out there and do it. And when you add all those plans up across all the LEP areas, you start to see a much better outcome for GDP than if you continue with what appears to be the overly-centralised way it has been done in the past."

More: The winner takes it all? Local Enterprise Partnerships – Paul Davies

CHARITIES

Liz Hazell, head of charities, PwC said:

"Charities have an increasingly important role to play in delivering services locally as the need for their services is effectively fuelled by government cuts, so it'll be important to see that the spending cuts don't weaken the potential for charities to deliver."

"Overall, for charities and social enterprises there is still a huge opportunity in delivering public sector services. But whatever the cuts, charities will be under more pressure than ever. Many have had government funding reduced, even where long term contracts are in place, renegotiation is happening as early as 18 months in. Small local charities, such as those delivering arts, training or services are particularly feeling the affects, but the pipeline  for funding at larger organisations is also drying up, and specific funding such as back to work programmes are also at risk."

"Since the last Spending Review, charities have worked through lots of cost-cutting and in some it's created leaner and more efficient organisations. But they've had to learn the hard way, and smaller organisations have struggled more, particularly as quite a lot of funding is now coming to charities in arrears after the service is delivered, whereas previously it came up front. Charities, particularly smaller ones haven't got the working capital or balance sheets to support this, and we're seeing more charities come to us for financial health checks, contract support and cash flow management advice.

In PwC’s sixth annual survey in collaboration with the Charity Finance Group and Institute of Fundraising.

  • 93% of fundraisers reported that the climate has got tougher over the last twelve months, 89% predicting the coming year will be even tougher.
  • 58% of charities reported Government measures had a negative impact on levels of funding.
  • Year-on-year increases in demand for services have continued, with 67% of respondents reporting an increase during 2012 and 72% expecting a higher demand for services in 2013.

Background to the Spending Review

Contact the PwC press office for further information or contacts from our regional or sector specialists.

Rowena Mearley:
Media Relations
Direct:020 7 213 4727 | Mobile:07841 563 180
Email: rowena.mearley@uk.pwc.com @rowenamearley

Lucy Bishop:
Media Relations
Direct: +44 (0) 20 7212 3205 |  Mobile 07907490153
Email: lucy.bishop@uk.pwc.com
www.ukmediacentre.pwc.com

@pwc_ukgov


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