Long before Osborne delivers the Emergency Budget, officials deep inside the Treasury had been working away on the Spending Review, to be announced in the Autumn Statement. While the Budget outlines the overall figure for the reduction, the final detail about departmental cuts will appear in this Spending Review. As one senior Treasury official put it, these ‘spending decisions reframed the question of what the UK could afford’. It is a tightly controlled operation: besides Treasury officials, and the voices of Osborne and his aides, the other heavyweight input comes from Danny Alexander, who oversees much of the detail. Cameron and his team at Number 10 follow discussions closely, but with the exception of defence, they leave the work very much to Osborne and the Treasury team. Although the Budget cuts are agreed relatively smoothly, the Spending Review negotiations sees the first skirmishes in a five-year battle between Work and Pensions Secretary Iain Duncan Smith (IDS) and Osborne. IDS will not agree to any cuts unless £2.5 billion is ploughed back in to fund Universal Credit, the centrepiece of his reform agenda.13 It is a sticking point for much of the negotiations and Osborne only reluctantly agrees in September at the eleventh hour.
Welfare is highlighted in the Budget as it will be cut particularly heavily, by £11 billion – largely through changing the measure of inflation used for welfare payments from the retail price index (RPI) to the consumer price index (CPI) – a hugely significant change. The NHS, unlike welfare, is a protected area. In Opposition, the Conservatives had been unequivocal in maintaining that the country could trust them with the NHS, and that they would protect real-term increases in NHS spending. Cameron and Osborne knew the general election could not be won on the NHS, but it could be lost on it, and they had been adamant that the area was sacrosanct. Protecting the schools budget is more contentious; Clegg and Alexander argue strongly for it, as does Education Secretary Michael Gove. Osborne assents, even though there is not the same political need to favour schools as the NHS. International development is the final protected area, primarily at the instigation of Cameron himself. When challenged over the years about the commitment to spend 0.7% of national income on aid, Cameron is apt to get testy: ‘It is one of the few issues on which he will lose his temper. It is a mixture for him of genuine compassion with political positioning of his party.’ A debate takes place whether the 0.7% should apply immediately or be delayed to 2015: they compromise on 2013.
Tuition fees for university students are to rise, despite a clear Lib Dem pledge to oppose any such increase. Osborne recognises that it will be a significant hit for Clegg (he tells his Tory staff, ‘They are mad to let us do this’), and offers to pass on the proposal telling him the change is not imperative. Clegg rejects the offer, a momentous decision for the future of the Liberal Democrats, believing again that the change is part of the necessary punishment. Clegg, Alexander, Cable and Laws had all tried and failed to change Liberal Democrat policy on tuition fees. None of them realise fully what turbulence the judgement will cause their party across the country. Debate also takes place over defence cuts. Defence is an article of faith to the right of the Conservative Party. But Cameron and Osborne are determined to plug the black hole in the defence budget. Clegg and Alexander agree the MoD is overprotective of its spending, and inefficient.
August is normally a quiet month in the Treasury, but this August the teams working on spending cuts are buzzing with activity. They are spurred on by radical thinking from some of the department’s young Turks as well as a crowd-sourcing exercise, pioneered by Steve Hilton, which solicits thousands of responses from the public on where savings can be made. By early September, it is clear where the main cuts will fall. Officials remain pleased to be working for a chancellor who knows what he wants to do. Osborne may not have developed any overriding philosophy for his cuts programme, yet he is certainly steely in his judgements. He and Alexander have been struck by Macpherson’s commanding advice: ‘You set the tight overall budgets, and the departments will find the savings. You can rely on the departments to ensure that they will get the money to the front line.’ It emboldens them to cut more deeply. They are impressed by the Treasury’s determination to enforce its will across Whitehall.
Cameron and Osborne had decided in Opposition that they wanted to have a major review of Britain’s foreign and defence commitments. Defence spending, they thought, was excessive, capricious and unrelated sufficiently to Britain’s strategic requirements and economic capability, all of which was exacerbated by a very badly run department. After the general election they move swiftly to set up the Strategic Defence and Security Review (SDSR), to run alongside the Spending Review, announced on 12 May in the Coalition Agreement. They know they will have a fight on their hands and that the defence and diplomatic communities will resist cuts fiercely, but they refuse to accept that defence cuts would lead to a diminution of Britain’s role in the world.
Cameron becomes closely involved in the SDSR personally because, as PM, he takes his responsibility for defending the nation extremely seriously: he knows it is a very sensitive area politically for his party, and he has to handle Liam Fox, a senior figure and former leadership rival, with care; but not so gently that he doesn’t insist that the SDSR is managed not by the MoD but by the National Security Council (NSC), a new body set up after the election to co-ordinate defence and security policy, operating out of the Cabinet Office. Once the SDSR begins, Osborne grows still more impatient with the military, whom he regards as guilty of special pleading: without Cameron’s restraining influence, the cuts would have been even deeper.14 Nothing prepares either man fully for the can of worms that they are about to open. The three services fight and fight each other over men and equipment, with long battles over aircraft carriers, jets, tanks and other hardware. Cameron and Osborne use the SDSR process to centralise power and decision-making in the NSC structure, utilising the full force of their election mandate to drive change through. The MoD fights hard, with Fox regularly articulating the anger of the defence community at having to take so much of the pain. He is angry that the protected areas – Health, schools, and International Development – escape free.
The SDSR is announced alongside the Spending Review. The MoD will face cuts of some 8% in real terms: Cameron announces the department is too big, too inefficient and is spending too much money.15 The strategy must shift, he says, away from military intervention towards conflict prevention, with a new focus on unconventional threats. The army will be reduced by 7,000 to a front-line strength of c.95,000, the Royal Navy by 5,000, to 30,000, and the Royal Air Force by 5,000 to 33,000 by 2015.16 The SDSR generates enduring bad blood, less from the Foreign Office and intelligence communities than from the MoD, especially from Fox and chief of the general staff, David Richards. Number 10 is furious at the briefing from the MoD to sympathetic journalists and to backbench Tories with service backgrounds. The SDSR does, however, achieve its desired end of savings, even if it creates bitterness that spills over in years to come, and is widely criticised for being rushed and insufficiently strategic.
Reorganisations have been a traditional way that governments have found money at times of need. Cameron is insistent, however, that there are to be no changes to the machinery of government. He has an instinctive dislike of organisational change in Whitehall, believing that it will not achieve efficiencies. The decision is equally taken not to embark on a series of privatisations, as Margaret Thatcher had done so successfully during the 1980s.
On the domestic front, some ministers argue hard against the Treasury, notably IDS at DWP, and Theresa May at the Home Office. None come close to resignation because they all understand the need for cuts; but equally none think that their own department should be the one to be cut heavily. Caroline Spelman claims she has done well for DEFRA by settling