Departments 'face months of funding uncertainty', OBR chair says

MPs are warned that lack of detail on spending beyond March 2025 will hamper leaders' abilty to plan
Richard Hughes appears before MPs yesterday Photo: Parliament TV

By Jim Dunton

13 Mar 2024

Office for Budget Responsibility chair Richard Hughes has told MPs that the government's failure to set out detailed spending plans for departments beyond next March poses a risk to the accuracy of the watchdog's forecasting – and will hamper civil servants' ability to plan.

Hughes' observations came at a session of parliament's Treasury Select Committee yesterday, which was looking at the impact of last week's Spring Budget and the OBR's economic and fiscal outlook report that accompanied it.

At the budget, chancellor Jeremy Hunt said the government would stick with a planned 1% increase to overall departmental funding for the period, with productivity gains expected to cover the shortfall in cash.

Hughes told yesterday's session that indications from HM Treasury were that there would not be a spending review ahead of the looming general eletion – which must be held by the end of January 2025. He said the situation meant that departmental leaders were heading into "unknown territory".

"The planning horizon for Whitehall departments could shrink down to a matter of a few months because those plans run out in March of 2025," he said.

The OBR's latest economic and fiscal outlook forecasts that borrowing will fall in each of the next five years while tax as a share of Gross Domestic Product rises to a "near post-war high" and per-person spending on public services is held flat in real terms.

The report says the combination is "just enough" to meet the government's fiscal rule that requires underlying debt to be falling as a share of GDP at the end of the five year period, in 2028-29. However it notes that the requirement is currently set to be met by a "historically modest" margin of £8.9bn.

Hughes told MPs yesterday that the lack of detail on public-spending plans beyond March 2025 was "one of the single biggest risks" to the OBR's forecast because actual spending could increse by tens of billions of pounds.

"We know the government's plans for National Insurance, we know the government's plans for energy taxation in five years time. But what we know about government's plans for spending on public services runs out after March of next year," he said. "And then, after that, the government just gives us two numbers to put into our forecast: One for total spending on public services, and one for total capital spending on public services. And no detail on what that means for the National Health Service, what it means for education and what it means for transport."

Hughes said the situation posed a "significant risk" to the OBR's forecast that the government would meet its fiscal rules because departments' funding envelopes were relatively restrained and not growing in real per-capita terms.

"What we don't see on the spending side is a plan for living within that relatively constrained envelope while also meeting what the government has also stated – which is objectives to grow certain large elements of public-servcie spending faster than that overall envelope," he said.

"They've got a workforce plan in the NHS, they've got commitments to grow defence spending in line with GDP, they've got commitments to grow overseas-aid spending in line with GDP. They've got ambitions in some of those areas to go even further. How they make that add up with the rest of Whitehall departments, we don't know."

The OBR's forecast said funding for the NHS Workforce Plan implied a growth of 3.6% each year for the four years starting in 2025-26. Meanwhile, the government plans to hold defence spending constant at 2% of GDP, with an aspiration to raise it to 2.5% of GDP. It added that meeting commitments on schools, childcare, and overseas aid would result in a real cut in all other departments’ budgets of 2.3% a year from 2025-26.

Hughes noted that past governments have been able to cut departmental spending in real terms, and cited the 2010-15 coalition government as a prime example. But he added that the Cameron government "had a detailed plan" for implementing cuts across different public services.

The OBR chair said experience with governments that lacked detailed spending plans indicated that they tended to exit spending review negotiations having had to "quite significantly" top up their provisional spending envelopes.

"Just based on the past pattern of governments, we have seen them add on to the tune of £20bn-£30bn to that envelope when it comes time to actually divide them up between departments," he said.

Hughes said that if ministers were unable to improve productivity significantly in so-called "unprotected" departments, the real value of spending on public services would go down and the quality of services would deteriorate.

He said improving public-sector productivity to pre-pandemic levels would improve the fiscal outlook by a magnitude of "several tens of billions of pounds".

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