The Institute for Fiscal Studies has questioned whether it is feasible for departments to stick to their 2021 Spending Review budgets – as required by chancellor Jeremy Hunt’s Autumn Statement – in light of mounting pay pressure.
Members of PCS, the civil service’s biggest union, are gearing up to strike at more than 100 departments and agencies in support of a 10% pay demand that is designed to attempt to keep up with inflation after more than a decade of freezes or sub-inflationary awards.
But the medium-term economic plans Hunt set out yesterday require most departments to stick to their 2021 Spending Review settlements this year, next year and in the 2024-25 financial year. The chancellor said departmental budgets would be “protected”, however permanent secretaries will need to find efficiencies to make up for the impact of soaring inflation.
In an initial analysis of the Autumn Statement, the IFS said public-sector pay, which is also the subject of looming industrial action by nurses and head teachers, was an elephant in the room for that task.
“Can cash spending plans for the next two years really be stuck to, in the face of higher inflation?” it asked in the briefing. “Pressure for higher pay awards, in particular, are likely to put pressure on departmental budgets.”
Senior IFS research economist Ben Zaranko noted on social media that current departmental spending plans were based on pay awards in the region of 2%-3% while the Office for Budget Responsibility is now predicting significantly higher inflation.
“The OBR expect CPI inflation of 7.4% over calendar year 2023. Over financial year 2023-24, they expect CPI of 5.5%,” he wrote.
“So 2% cash pay awards for that financial year would represent a real pay cut of more like 3.5%.”
Office for National Statistics figures this week said inflation as measured by the Consumer Prices Index was 11.1% in the year to October.
Toughest times for departments ‘will come after 2025’
The IFS briefing also suggested that the years after 2024-25, for which Hunt has pledged 1% annual rises in public spending, would be a time of particular difficulty for departments.
“Beyond the end of the Spending Review period – which coincides with the likely date of the next election – he cut back plans for public service spending,” the IFS said of the chancellor.
“Departments’ day-to-day budgets will still grow, on average, but less quickly than previously planned.”
It said that decision alone accounted for roughly 40% of the £55bn “fiscal tightening” announced in the Autumn Statement for 2027-28, while a cash-terms freeze on capital spending would equate to real terms cuts and a “£14.8bn tightening” relative to previous plans.
The IFS briefing said real questions remained about whether the post-2025 provisonal spending plans could realistically be implemented and where the cuts would fall if they were.
“Since 2015, these provisional spending totals have, in the event, been revised upwards by an average of 3.7%,” the briefing said. “Were that to be repeated, that would suggest an extra £18bn of spending in 2027-28.”
It added that if the NHS budget grew at anything like its historical average, and the defence and overseas aid budgets grew in line with the economy to maintain the 2% and 0.5% of GDP commitments, all other areas of government work could face new cuts.
“For areas like local government, prisons, the police, HMRC and the courts system, that could spell a very difficult few years indeed,” the briefing said.
IFS director Paul Johnson said Hunt had chosen to delay the biggest hits to public services until the period after the next general election.
“The fiscal tightening is heavily back-loaded, with the vast bulk of spending cuts in particular pencilled in for after April 2025,” he said.
“Given the profound uncertainty around the outlook, and the potential economic and social costs of an unnecessarily large up-front fiscal tightening, this is probably the right choice, on balance.
“But delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of these plans. The tight spending plans post-2025, in particular, may stretch credulity.”