Summary and implications

The first thing to note about the Comprehensive Spending Review (CSR) is that the document itself is around 100 pages shorter than its 2007 predecessor.

It represents an overview of Government intentions, as opposed to the finer detail of spending commitments, and the detail behind what is being proposed will emerge. A raft of policy and draft legislation is due to be released before the end of the year and the real impact will become much clearer then.

What is already clear is that the Government will attempt to augment the unprecedented spending cuts with some significant reforms in respect of the functioning, and functions, of government.

The Government has been brutal in cutting expenditure that could not demonstrate real economic benefit driving growth for the UK. Clear examples of this are the cuts in the welfare and social housing benefits.

Key areas

Transport

Transport is, in some senses, a winner from the CSR. The obvious economic benefit improved transport brings to an area has meant that those projects which are seen to be of high economic value will go ahead. Key announcements as follows:

  • £10bn has been allotted for key road and local transport schemes. These include work on the A11, M11, M4 and M5, easing congestion on M1, route extension and capacity increases on the Midland Metro, upgrades to the Tyne and Wear Metro and constructing a new suspension bridge over the River Mersey;
  • £14bn to Network Rail for improvements. These include improvements to the East Coast Mainline, station upgrades at Birmingham New Street and network improvements in Yorkshire, Lancashire and the Barry to Cardiff corridor, delivering faster journey times in the North West, improving reliability on the Great Western Mainline services to Wales;
  • The cap on regulated rail fares will be raised to 3 per cent above RPI for three years from 2012 (with the intention that this will help pay for investments in rolling stock);
  • Funding will be made available to enable Crossrail to go ahead;
  • £6bn has been allotted for improvements on the London Underground;
  • PFI’s in Sheffield, Hounslow and the Isle Wight for Highways improvement and maintenance, and the extension of the Nottingham tram network with two extra lines will proceed, together with the Mersey Gateway and Thames Bridge Gateway PFIs;
  • Key announcements concerning the High Speed Intercity Express Programme will follow shortly;
  • Local government resource grants (which fund local transport needs) will be reduced by 28 per cent, though the number of grants will be simplified with the intention of giving local authorities more control and greater flexibility in how this money is spent;
  • Whilst some projects are continuing, the Government will be looking to ensure they are delivered efficiently, and that costs are reduced wherever possible.

This is good news and does represent a commitment to continued investment in key transport infrastructure.

Climate Change & Energy

Significant reforms and initiatives have been reaffirmed and/or announced in this sector:

  • Of particular interest is the reform of the CRC Energy Efficiency Scheme (CRC), which sees a U-turn on the assurance that the Scheme would be “revenue neutral”. There will be significant implications for businesses and organisations caught by the CRC, as previously recycled allowance payments are turned into an energy tax;
  • The scheme has been allegedly “simplified to reduce the burden on businesses”. Revenues from allowance sales (£1bn a year by 2014–15) will now be used to support public finances, instead of being recycled to participants. Clarification is needed on how this will function, but it may make landlords more likely to seek to push down the CRC cost to their tenants. The first allowance sales for 2011–12 emissions will now take place in 2012 rather than 2011;
  • Proposals to start a Green Investment Bank have been reaffirmed. Initial capitalisation will come from DECC (£1bn) and “additional significant proceeds” from asset sales and other private sector investment;
  • The Renewable Heat Incentive will be introduced from 2011–12, promising savings of 20 per cent by 2014–15 compared with Labour’s plans. The scheme will no longer be funded through a fossil fuel levy and £860m of new support is intended to be made available for households and businesses;
  • The Feed-in-Tariffs scheme will be reviewed to place more emphasis on cost effective carbon abatement technologies. Support for lower value innovation and technology projects will be reduced, saving £70m a year by 2015. £5.6m of support is set to be provided, though this figure is an estimate of support from utility companies;
  • Port manufacturing, offshore wind technology innovation and energy efficiency technology for buildings have been pushed together as recipients of “over £200m”, with little clarity at the moment over how this will be apportioned;
  • £1bn will be spent on one Carbon Capture and Storage Technology (CCS) demonstration plant. This funding will not require a levy on electricity supplies;
  • The Coalition Agreement promised public funding for three further CCS demonstration plants, which the Government “remains committed” to, but will decide whether these funds should come from general public spending or a levy on electricity supplies in Spring 2011.

Once further detail is available, the Government reforms and spending plans outlined above will present business opportunities in these areas.

Education

Education is a mixed story, with some goods news and some bad. The Chancellor stated that the Government has succeeded in, “finding more resources for our schools and for the early years education of our children” even when spending is being cut. Key points as follows:

  • The schools budget will rise from £35bn to £39bn and there will be £15.8bn of capital funding in education over the CSR period;
  • Capital funding will be used to maintain the school estate and rebuild and refurbish schools. That funding will be focused on meeting demographic pressures and addressing real maintenance needs;
  • The Government will offer 15 hours a week of free early years education and care to all disadvantaged two year olds from 2012–13, at a total cost of around £300m per year and maintaining the universal entitlement to 15 hours for all three and four year olds implemented by the Coalition Government;
  • The plan is to protect Sure Start in cash terms, including new investment in Sure Start health visitors. Sure Start will be refocused on its original purpose of improving the life chances of disadvantaged children;
  • A new £2.5bn pupil premium will be introduced that supports the education of disadvantaged children. The education settlement includes real terms increases of 0.1 per cent in each year of the Spending Review for the age 5 to 16s school budget. Underlying per pupil funding will be maintained in cash terms;
  • The Government plans to support parents, teachers and community groups to establish Free Schools outside of local authority control;
  • Head teachers will have increased flexibility over their budgets, including through simpler, fairer and more transparent funding streams;
  • Reforms will be made to further and higher education in consequence of the recent review of Lord Browne.

While the cuts to the BSF programme, announced earlier in year, are not good news in terms of old-style education PFIs, it is clear that capital spending will remain and that resources will be targeted towards areas where it is most needed. The wider educational reform agenda, for example; the devolution of budgetary control to schools, will present interesting and varied opportunities.

Health

The CSR followed up on recently-announced reforms in the health sector and demonstrated that health is a key area of Government focus. Important announcements as follows:

  • Commitment to total NHS spending increasing in real terms in each year of the Parliament – funding for priority hospital schemes including St. Helier, Royal Oldham and West Cumberland;
  • An allocation of £2bn a year of additional funding to support social care – this money being provided via local authorities;
  • A commitment to public service reform – in particular “increasing diversity of provision through further use of payment by results, removing barriers to greater independent provision, and the “big society”;
  • In headline terms the NHS will see a 1.3 per cent cumulative real growth in spending – from £98.7bn in 2010/11 to £109.8bn in 2014/15;
  • In contrast the capital budget for health shows a minus 17 per cent spending plan – £5.1bn in 2010/11 to £4.6bn in 2014/17 although this is higher in real terms than the previous spending review period;
  • A theme appeared to build closer links across health and social care, including the means by which these are funded. This will have implications for the arrangements between local government and the health service, as well as for providers. There is to be a new “Public Health Grant” in the Grant Support Funding given to local authorities;
  • There is a restatement of the NHS commitment of up to £20bn of annual efficiencies savings through the Quality, Innovation, Productivity and Prevention programme plus the commitment to abolish PCTs and Strategic Health Authorities by 2013. In particular, and as already announced, GPs will have power to commission care – promoting patient choice and provider competition.

As with education, there will be significant changes in the healthcare market. In particular, capital projects will continue (where there is a pressing need), and the wide-ranging reforms will create market opportunities.

Local Government/Public Services Reform

This is a key area of Government reform and it is clear from recent media announcements, as well as the CSR, that far reaching changes to the local government sector are planned:

  • Funding from all departments to local authorities will fall by around 45 per cent over the CSR period. The Government will prioritise capital investment in areas of greatest economic value such as high value local transport;
  • Significant financial control is being devolved from Government to local authorities. ring fencing of all local government revenue grants will end from 2011–12, except simplified school grants and a new public health grant;
  • Local authorities retain the right to make their own capital investment decisions. Government will maintain flexibility of prudential borrowing. Interest rates on Public Works Loan Board (PWLB) loans have been increased to one per cent above UK government gilts;
  • Community budgets will be established in 16 local areas to pool departmental budgets for families with complex needs and rolled out to all local areas over the Spending Review period;
  • Backing up recent policy announcements, new powers to implement Tax Increment Financing will also be detailed in forthcoming White Paper on sub-national growth;
  • Government will pay and tender for more services by results, rather than being the default provider of services. The use of simple tariffs and more innovative payment mechanisms will be explored in new areas, including community health services, processing services, prisons, probation and children’s centres;
  • The Government will work with the financial sector and the voluntary sector and community groups to develop innovative equity investment opportunities in public services;
  • Local authorities will be encouraged to look closely at asset lists and to dispose of anything that is deemed surplus or not VfM;
  • The Regional Growth Fund will be increased to £1.4bn. The fund will invest in projects and programmes with significant potential for growth and employment and with in particular support those areas and communities which are currently too dependant on the public sector. A panel will assess funding bids made by the private sector and public-private partnerships, including Local enterprise partnerships (LEPs);
  • Regional growth White Paper will be published shortly and will provide more detail on LEPs, planning reform, incentives and regional economic development policy;
  • Proposals to reform the planning system so that it becomes more efficient, effective and supportive of economic development and it will increase housing supply;
  • There will be a presumption in favour of granting planning permission for sustainable development;

Local government reforms outlined above, and wider changes involving devolution of financial powers that can aid infrastructure procurement, will present a number of significant opportunities for service providers. Greater ingenuity in the delivery of services, including a focus on doing more with less and increasing involvement of the private and third sector will make the interface between public and private sector even more important. The White Paper on Sub national growth and the Localism Bill will be key.

Housing

The Department for Communities and Local Government has been particularly badly hit by the CSR. The FT has reported that overall grant funding for social housing has been reduced by over 60 per cent. Key announcements as follows:

  • Reform of the council house finance system intends to give local authorities more control over their finances;
  • Wider reform will aim to provide a more tailored response to individuals, and provide housing at an appropriate level;
  • The Government aims to deliver up to 150,000 new affordable homes over the CSR period, through reforms and continued capital investment of £4.4bn;
  • Introduction of a New Homes Bonus will incentivise local authorities to support housing growth. This will be the equivalent of matching Council Tax from every new home for each of the following six years;
  • This will be accompanied by reform of the planning system aimed to support economic growth and increase housing supply;
  • The Chancellor highlighted that a reduction in social housing stock from 1997–2009 has resulted in longer waiting lists and families dependant on subsidised housing.

Further capital investment in social housing has been backed by the Government but it is not yet clear precisely how that investment will be delivered.

Infrastructure

The Chancellor confirmed that the National Infrastructure Strategy will be published next week.

This will include further detail on the financing of the UK’s estimated £500bn infrastructure “gap” and, given the lack of announcements regarding additional PFI credits, together with the fact that there will be no additional funding for the Treasury Infrastructure Finance Unit should make for interesting reading.

PFI was mentioned briefly in the CSR. Seven waste PFIs have had their PFI credits withdrawn by Defra and their ongoing affordability may well be challenged because of this. In addition, some oblique comments in the CSR seem to suggest that the system of central government PFI credits (essentially HMT funds that aid the affordability of PFIs) will be phased out and an alternative model introduced.

Government Property

There is a stated intention to introduce a new system of national property controls across the central civil and operational government estate. There will be a coordinated approach to property asset management in the public sector and the Government Property Unit will set up property vehicles for central London and Bristol from 2011/12. This presents an opportunity for the private sector to acquire and operate large tracts of government estate.

Conclusion

The key themes from the CSR are:

  • Taken as a whole, it is clear that there will be very real opportunities for the private sector as a result of the Government’s spending plans and its broader ideas for reform in the delivery of public services.
  • Infrastructure investment will be more targeted on projects that demonstrate an economic benefit (e.g. water, waste, energy, transport and communications, each of which falls under the remit of Infrastructure UK).
  • Local government reform – far reaching cuts in government grants, but the localism agenda signals greater flexibility over how services are configured and paid for, including new means of raising capital (e.g. TIFs).
  • The increase in the Regional Growth Fund budget, and the express recognition that Local Enterprise Partnerships (in essence, replacing RDAs) will have a pivotal role to play confirms what was already understood.
  • Government property is a key focus – for both disposal and more efficient management.
  • There will be continued capital spending on schools, social housing and health – and targeted capital spending in energy – but patently the levels have been reduced and the priorities have shifted.