Departments facing 16% real-terms budget cuts, think tank predicts

Such a big five-year drop in spending "looks completely undeliverable", Resolution Foundation research director says
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By Tevye Markson

06 Nov 2023

Unprotected departments’ spending power is set to be cut by 16% in real terms between 2022-23 and 2027-28, even higher than the 11% anticipated at the time of the March budget, a think tank has predicted.

James Smith, research director at the Resolution Foundation, said such a drop in department spending “looks completely undeliverable”, speaking at an event held by the think tank to discuss the upcoming Autumn Statement.

“Where this really gets scary is where you take out the effect of a bunch of departments where the government has said they’re going to protect spending,” Smith said.

The government has made commitments to increased spending in health, education and defence in recent budgets. Smith said this, in addition to high levels of inflation, " implies something quite difficult” for unprotected departments. 

Taking the panel through the think tank's latest report – Preparing the pitch: Autumn Statement 2023 preview – he said unprotected departments such as the Ministry of Justice, Department of Levelling Up, Housing and Communities and the Home Office "are already in a difficult position – you can see that from the state of public services" and are now facing "something like a 16% fall in their budgets based on inflation", or £20bn per year, based on their cash allocations.

Smith said the potential cuts to departments' per-capita spending would "basically take us back to George Osborne early-2010s level of cuts", adding that "all of this really looks absolutely like a total fiscal fiction”.

A government spokesperson said such a comparison is "misleading" as it refers to two different lengths of time. George Osborne's austerity cuts in the early 2010s slashed per-capita spending on unprotected departments by 16% between 2010-11 and 2013-14. 

The Resolution Foundation has predicted high inflation, which is currently at 6.7%, will increase the chancellor's fiscal headroom to around £13bn in his Autumn Statement. However, it said this extra headroom is a "'fiscal illusion' founded on pretending the higher inflation that boosts tax revenues won’t push up spending too".

Former cabinet secretary and Treasury permanent secretary Gus O'Donnell made similar comments earlier this year, calling current department spending plans "completely unsustainable".

Smith also warned that potential tax changes in the Autumn Statement, such as another fuel duty freeze or making an investment tax break – the so-called full expensing policy – permanent could make the situation even worse.

He predicted that, if fuel duty does not rise by 5p next March plus RPI each year, it would cost £4bn, while making the full expensing policy permanent would cost around £9bn per year.

Low potential growth makes for “painful” choices

Smith said the underlying issue causing the difficult fiscal situation is low potential growth, worsened by leaving the EU and a lack of public investment.

He pointed to the Bank of England’s estimate that potential growth in the economy in the next few years will be about 1% per year. When population growth is taken into account, this would mean a rise in GDP per head of around 0.5%, he said.

"Then you allow for the effects on public finances of demographics [and] rising debt service costs. No matter how you cut it, that’s going to be a painful squeeze of little or no growth in public spending, and/or a rising tax burden," Smith added.

Smith said growth could be improved, however, with higher public investment, closer trade links with Europe, a greater emphasis on maths, science and education, and by building more houses.

But he warned: “Until we break out of low potential growth, the fiscal choices are painful."

Smith said Rishi Sunak gets some credit for his "Maths to 18" policy, “but only a very small mark because we don’t employ enough maths teachers to meet his aim”.

A government spokesperson said: “This report misleadingly compares different lengths of time. Total departmental spending will be around £100bn higher in four years’ time, even after taking account of inflation, while reducing national debt.

"But we must break out of the cycle of ever-more spending, which is why we are accelerating reform so that frontline workers can focus on what they do best: teach our children, treat us when we’re sick and keep us safe.”  

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