Spring Statement: Sunak’s silence on departmental spending ‘signals new squeeze’

Institute for Fiscal Studies says lack of new cash chips 10% off Spending Review settlements
Chancellor Rishi Sunak delivers the Spring Statement yesterday. Screengrab: Parliament TV

By Jim Dunton

24 Mar 2022

Chancellor Rishi Sunak’s decision not to boost departments’ three-year spending allocations in the Spring Statement in the face of rapidly-increasing inflation makes the settlements 10% less generous than they were just five months ago, the Institute for Fiscal Studies has warned.

Sunak focused most of yesterday’s package of measures on domestic cost-of-living assistance, such as the temporary 5p cut to fuel duty and lifting the threshold at which people begin paying national insurance contributions on their earnings.

Think-tank the IFS said those measures would add £10bn to public borrowing over the coming year, while inflation would add £32bn to the servicing cost of the portion of government debt that is index-linked, wiping out a forecast increase in receipts that is linked to much higher inflation.

The IFS said the fact that the Spring Statement contained no major announcements on public spending – either for  departments or in relation to working-age benefits and pensions – meant that those cash settlements were worth less in real terms than they were in October. 

The Bank of England said last week that it expects inflation as measured by the Consumer Prices Index to hit 8% this spring, and cautioned that it could rise higher by the end of the year.  Working-age benefits and pensions are due to rise by 3.1% over the coming year.

The IFS acknowledged that growth in the GDP deflator measure of inflation used for public-sector finances was “forecast to be considerably more muted” than CPI inflation at 4% in 2022-23. But it said the effect was currently expected to turn the 3.3% annual growth in spending on public services set out in October's Spending Review into a 2.9% year-on-year increase.

“The chancellor’s spending plans are therefore around 10% less generous than he originally intended them to be,” it concluded in a briefing.

“To compensate public services fully – thereby maintaining the real-terms growth rate he announced in October – he’d need to top up his plans for 2024-25 by around £7bn.”

The IFS said inflationary pressures meant the NHS England budget was now set to grow by 3.6% per year, down from 4.1% under October forecasts, and the schools budget would only grow by 1.7% per year, down from 2.2%. The Ministry of Justice will see its expected 4.0% annual growth pared back to 3.5% over the three-year period. The Ministry of Defence is now on course for its allocation slip into negative territory, with projected annual growth of -1.4% over the period.

Senior research analyst Ben Zaranko said the only outcome if no further funding was found for departments and the NHS was a “squeeze” on public services over the remainder of the spending review period.

He conceded, however, that there was an argument for Sunak to wait until this year’s Autumn Budget to revise departmental spending allocations.

“Soaring inflation means a sizeable unintended cut to the generosity of the chancellor’s spending plans for public services, for the simple reason that the same cash budget can now purchase less in the way of goods and services,” he said.

“Higher inflation has wiped out more than 10% of the real-terms increase he pencilled in last October. Notably, the Ministry of Defence will see the real value of its budget fall between this year and next.

“This poses a significant challenge for the chancellor – though one that he was perhaps wise not to tackle yesterday.

“It makes more sense to wait for greater clarity on energy prices and pay settlements before making any necessary adjustments in the autumn. If no additional funding is forthcoming, because any fiscal headroom is instead dedicated to pre-election tax cuts, public services will feel the squeeze.”

Zaranko also noted that the current  financial climate would make for “big, difficult decisions on public sector pay”over the summer.

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