Autumn Statement: Unprotected departments face real-terms cuts of 3.4%, IFS warns

Think-tank says shrinking capital spending will be problematic for public-sector productivity drive
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By Jim Dunton

23 Nov 2023

The Institute for Fiscal Studies has warned that some English government departments will face real-terms budget cuts in the region of 3.4% in the coming years as a result of the measures unveiled in yesterday’s Autumn Statement.

The think tank said the spending plans set out by chancellor Jeremy Hunt, and accompanying data from the Office for Budget Responsibility, underscored a further contraction of the “real-terms generosity” of public-spending plans.

Hunt’s plans include £19bn in tax cuts, accompanied by increasing departmental budgets by around £5bn a year. However, in proportional terms, the IFS said budgets were “largely untouched”.

Meanwhile, the IFS said public sector cost-inflation projections – as measured by the GDP deflator – were much higher than they were in March.

The GDP inflator is now forecast to be 6.1% in 2024-25, up from March’s projected 2.5%. It is also higher for all other financial years to 2027-28 than was the case eight months ago.

IFS research economist Bee Boileau said in a presentation this morning that the impact was that the real-terms generosity of overall public-service spending was now much lower than it had been in March.

She said spending plans at the Department of Health and Social Care, the Ministry of Justice, the Department for Education, the Home Office and the Ministry of Defence would be “squeezed”.

While funding for NHS England, schools, the MoD and the Foreign, Commonwealth and Development Office has a degree of protection, Boileau said the spending power of other departments would be affected more badly.

“The outlook for unprotected departments looks pretty tight,” she said. “We expect those to fall by 1.8% annually in real terms. Those are budgets for local government, further education, courts and prisons for example.

“Even this is an underestimate. We know that when funding for the NHS in England is topped up this means more funding for devolved governments in Scotland, Wales and Northern Ireland.

“When we account for this, it looks like cuts for unprotected English departments are of the scale of 3.4% a year in real terms. We estimate that in the final year of this forecast in 2029-29 around £20bn will be required to avoid making any cuts to these unprotected budgets.”

Yesterday, OBR chair Richard Hughes observed that the spending-power pressures faced by the public sector were equal to the tax cuts Hunt had announced.

In her presentation today, Boileau noted that the outlook for capital spending in the public sector appeared “tighter” than for revenue spending.

“There’s no extra cash that’s been announced for capital spending and this is lower each year in real terms,” she said.

“The government hopes these tight plans for public spending might be achievable if there’s a large boost to public sector productivity.

“But this will only help if public services can reduce inputs, allowing the government to spend less, rather than reducing public sector output.”

Boileau said the magnitude of the reduction in proposed capital spending was so significant that even the additional £20bn pledged by the Labour Party would not divert its downward trajectory as a share of GDP by 2028-29.

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