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Autumn Statement – More For Less Continues By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory

osborne26 Nov 15. We had feared the worst but when the Autumn Statement was announced by the Chancellor of the Exchequer yesterday afternoon in the end it contained far less bad news than good. So, better than feared but still based on getting more for less. We should not forget that all none protected government departments have agreed to wide ranging cuts of 30% spread over the four remaining years of this Government. On an annual basis that works out to be 8% in each of the next four years. So, plenty more pain lies ahead.

The underlying intention of the Autumn Statement is based on a plan that seeks to remove another £21.5bn of departmental public sector costs in 2016/17 and beyond. This includes a plan to remove £12bn out of welfare costs and also cut costs in the NHS whilst at the same time raising the overall budget by £3.8bn next year and £8bn by 2020/1 taking the overall cost of the NHS to £106.5bn next year and £119.6bn in 2020/21. The 2016/17 figure represents a doubling of NHS costs since 1997.

The scrapping of the planned tax credit cuts surprised a great many and in hindsight was a good move by the Chancellor and supported by the unexpected improvement in public sector finances. I do not question the reasoning although I do express concern here that as the bulk of our growth appears to be consumer and services led more needs to be done to encourage innovation, research and technology creation and development, skills, engineering and manufacturing and the ability of the nation to produce more of what it consumes. Cutting the budget for UK Trade and Industry does not go down well with me.

Industry gets very little additional assistance from the Autumn Statement this time but I am sure they will cope. On the other side of the coin those with two houses or who are engaged in buy-to-let activities will pay more in stamp duty. Tax raising plans such as these are sensible and personally I would like to see more of them. In addition Council Tax will rise as the subsidy to local councils is reduced by HMG. Not surprisingly media has been very quick to point out that although the Chancellor announced that his removal of tax credits would be scrapped, following severe opposition in the House of Lords, the increase in planned welfare cuts and the introduction of the Universal Credit, the planned replacement for the latter, will hit many families on low incomes.

The plan to build 400,000 new homes is a perennial hope of all governments and probably best left in the wait and see category. That said, the intention is there and the spirit of the Chancellor is clearly willing. I also applaud the decision to remove tax free childcare for families earning over £100,000K, that the basic state pension will rise to £119.30 next year and that the holy grail of crackdown on tax avoidance has a £5bn price on its head for the next fiscal year. All of this is sound enough strategy and it will be interesting to see how non protected government departments such as Transport set about reducing costs by 30%.

 

Much of what emerged yesterday is based on the Office for Budget Responsibility upwardly adjusting expectations of tax receipts meaning that the public sector finances in the fiscal year 2016/17 are expected to be £27bn better off than previously expected. I do not doubt for a moment that the OBR is anything other than correct in its assessment for 2016/17 although, as suggested earlier, I am bound to be concerned that economic growth expectation which is at the heart of the overall reasoning could, if the global economy dips, impact negatively on our growth expectations for 2017/18 and beyond.

Neither should we lose sight of the £17bn of savings that the Chancellor announced in his previous budget in July. Those measures included a four year pay freeze for civil servants including teachers, nurses, police officers and members of the armed forces proposed. Back in July the reality of this was that public sector pay rises would be limited to 1% a year over the remaining four years of the present government. The £17bn budget savings plan announced in July included proposals for £12bn of welfare cuts and £5bn from tax evasion/avoidance measures. None of this has gone away.

At the time the government also announced an intentions to conduct asset sales including the remaining stake in Royal Mail (the latter was completed two months ago) with the intention of raising in the region of £31bn through the remainder of the 2015/16 fiscal year. To this can now be added the National Air Traffic Control system NATS and various other small state owned assets that the Government is seeking to clear out. I will provide a view on this separately over the coming weeks.

Yesterday Autumn Statement provided no additional detail on public sector pay intentions as far as I can see although it is clear that the expectation is that more public sector jobs will be lost. In the Strategic Defence and Security Review published on Monday the Government announced an intention to remove another 30% of civil servants from the MOD. It seems to me rather odd that defence has been singled out for such drastic and in my view, dangerous cuts. Whilst I accept that the devil is always in the detail and, like the defence and security review, there is probably as much that we have not yet been told in terms of assumptions as those that we have and that are contained in the Autumn Statement as published I am more than a little concerned that defence, now a protected budget, has been singled out for such a high percentage of civil service based cuts.

Along with most others I also wish to see ever greater cost efficiencies being achieved by all those employed in the civil service. And having noted that that many government departments voluntarily accepted to make 30% departmental cuts over four years that will have to include slashing civil service based posts I am bound to be concerned whenever I see large numbers of skilled personnel removed from important government departments at a time when they are needed. In saying this I am taking full consideration of the valuable job of work that the majority of these highly skilled people do and of how important they are to the proper working of UK defence. Suffice to say that after previous rounds of cuts the ‘commercial’ activities of MOD have been struggling to do all that was required of them.

It is worth noting that over the past seven years various measures to reduce civil service posts have been implemented across the MOD as they have too in uniformed staff. Two of these cost reduction exercises were to lead to staffing cuts of 20% each. The loss of sometimes irreplaceable skills is very damaging for defence at a time when not only are some existing teams struggling to do that much more than bare essentials of work but also at a time when the procurement budget is rising.

 

Thus I am bound to wonder how such an intent can be achieved without serious disruption. Of course it was right to seek greater efficiency across defence and to provide best value for the taxpayer. Industry, military and the civil service have all played a part in seeking greater efficiency but if MOD is to take out another 30% of civil service posts as has been outlined I fear that we will very soon be facing a very serious shortage of skills needed to make defence procurement decisions work.

 

Of course, increased outsourcing will to a small extent help and while this has been proven to work in a great many areas of defence support we should not see outsourcing as an option for everything. In any case, I am bound to ask whether good outsourcing deals be achieved with the 70% of civil servants that will be left standing to organise them. Is this another West Coast Main Line botch in the making?

 

Finally, to the handful of US citizens on this particular list (most are on a separate list) may I wish you a very ‘Happy Thanksgiving’. Note please that given the fact that I am attending the Manufacturing Awards Dinner in Birmingham this evening and then lecturing on defence at Birmingham University on Friday followed by various company visits during a good part of next week that the appearance of ‘Commentary’ will of necessity be spasmodic over the next week. Normal service resumes afterwards!

 

CHW (London – 26th November 2015)

 

Howard Wheeldon FRAeS

 

hwheeldon@wheeldonstrategic.com

 

Tel: 07710-779785

 

 

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