Spending review: Osborne orders Whitehall to draw up plans for 40% cuts

George Osborne has ordered government departments to plan ways to cut up to 40% from their budgets by 2019-20 in a bid to find an additional £20bn savings in public spending.

Government must “take a step back and think about the shape of the state”, finding ways to “deliver more with less”, the chancellor said.

Letters will be sent to the head of every department that does not have ringfenced funding, asking them to model two scenarios of 25% and 40% of real-terms savings by 2019-20, the same levels of reduction requested before the 2010 spending review.

“When it comes to building a Britain that lives within its means, we need to finish the job,” Osborne told parliament on Tuesday, repeating the government’s aim to clear the deficit by 2019-2020.

In the summer budget earlier this month, Osborne set out £12bn of savings from welfare and £5bn from changes to the tax system, which he said would deliver half of the money needed to clear the deficit.

The chief secretary to the Treasury, Greg Hands, will write to government departments asking them to draw up plans to deliver the remaining £20bn in a comprehensive spending review in November.

Cabinet ministers will set out proposals for cuts to their departments in October and the detailed review will be published on 25 November.

Osborne said the spending review would “support our priorities like the National Health Service and national security” but said other areas would have to make significant savings.

“We’ve shown that with careful management of public money we can get more for less and give working people real control over the decisions that effect them and their communities,” said the chancellor.

Osborne claimed that while parliament had made savings of £98bn, public satisfaction with many public services had continued to improve. He pointed to figures that suggest satisfaction with the NHS is at record levels, crime rates are falling, and the number of pupils taught in schools rated good or outstanding by Ofsted is increasing.

Speaking to the BBC’s World at One, Cabinet Office minister Matt Hancock acknowledged that cuts of 40% would mean radical changes for departments.

“We have got to see where we can best make the savings across the whole of government,” he said. “It is worth looking at what that looks like in each case. In each department, you do want to look at what a radical change would mean.”

The plans include maintaining Conservative party manifesto commitments to maintain per-pupil spending, to increase spending in the NHS and to continue spending 0.7% of GDP on international aid and 2% on defence.

The spending review will include an inspection of aid spending across all departments to ensure it “represents high value for money”. It will also continue to “examine pay reforms and modernise the terms and conditions of public sector workers”.

The chancellor has asked all relevant secretaries of state to consider what they can devolve to local areas and where they can facilitate integration between public services. “Devolution to Scotland, Wales and Northern Ireland is well under way. Devolution within England has only just begun,” said Osborne. “This pending review is an opportunity to take a further big step forward.”

The review will put an end to contractual progression pay across the civil service. Despite the public sector pay freeze announced in 2010, many public sector workers have continued to get pay rises because of contractual obligations to staff.

The spending review will focus heavily on further land asset sales. Over the past five years, central government has reduced its estate by 2m sq metres, generating £800m in savings on running costs and raising more than £1.7bn in receipts from sales.

According to the Treasury, the government still owns more than £300bn worth of land and buildings, with the Ministry of Defence owning approximately 1% of all UK land, or 227,300 hectares.

According to the document (pdf) setting out the chancellor’s spending review priorities, central government’s administration costs will have fallen by the end of the current financial year by 40% in real terms, or £7bn, since 2010.

The shadow chancellor, Chris Leslie, said that it was clear the chancellor did not have a plan for “sensible savings to public services”.

“Departments are not being given a clear sense from the Treasury of what to plan for in the spending review, particularly since we’ve seen three sets of spending plans in the last few months,” said Leslie.

“Britain’s public services need a coherent plan to balance the books and put productivity first, not a chancellor who chops and changes from month to month, ditching manifesto commitments on childcare, rail electrification and elderly social care.”

Speaking to parliament’s foreign affairs select committee, the foreign secretary, Philip Hammond, said experience had taught him that the “initial pitching” from the Treasury on the scale of the cuts departments needed to find “should be regarded as aspirational”.

Hammond said the Foreign Office could make further efficiencies by “downgrading” non-essential activities, but added: “I do not think that savings on the scale that are indicated by the fiscal trajectory can be delivered simply by cheeseparing across the piece. I think we need to make some strategic decisions about where we need to focus resource and where we need to downgrade.”