Economic bounce-back ‘won’t shield departments in Spending Review’

Institute for Government says Sunak will need to find additional funding to protect public services
Stefan Rousseau/PA Wire/PA Images

By Jim Dunton

31 Aug 2021

A rosier economic outlook from the Office for Budget Responsibility could give chancellor Rishi Sunak an extra £12bn to allocate in this autumn’s Spending Review, but it won’t cover departments’ ongoing pandemic spending pressures,  the Institute for Government has warned.

A report from the think tank says day-to-day departmental spending is set to increase by 6% in real terms over the three-year spending review period, while last year’s Spending Review and Sunak’s March Budget contain settlements that will see unallocated expenditure increase by just 3% by 2024-25.

The report acknowledges that the rate of increase in unallocated spending is greater than departments received in the 2010 and 2015 multi-year settlements, and “might just be sufficient” to meet new demographic demand pressures on public services in the coming years.

But it cautions that the figure is “unlikely to be sufficient” to meet new coronavirus-related pressures.

Report authors Thomas Pope, Gemma Tetlow and Graham Atkins said there are “several reasons” to think that Sunak will need to find new money to maintain the quality of public services. And they noted that the chancellor’s existing spending plans have not allocated funding to deal with pandemic-related costs, or income shortfalls on the part of local authorities and transport providers, beyond 2021-22.

“Extra money will be needed to meet the costs of ongoing test and trace, and vaccination services beyond this year,” they said.

“The OBR estimates that these could cost an additional £3bn in 2022-23 and an additional £1.5bn in 2024-25.”

They added: “Worsening physical and mental health as a result of the pandemic could also add further pressures to health services.

“If the government decides it wants a health system that is more resilient to future shocks – possibly by operating with more spare capacity – this would also require even more health spending.

“If more people work from home, maintaining existing transport services will require a greater subsidy from the public purse. The OBR estimates this could cost £1.2bn in 2024-25. These changes to commuting patterns, as well as changes to shopping behaviour, could also continue to have an impact on local authority revenues from car parking, commercial property and business rates.”

The IfG added that growing hospital waiting lists resulting from the pandemic, a backlog of court cases and additional education support for children most affected by the loss of face-to-face tuition over the past 18 months could require a combined £3bn a year in additional funding to address.

Pope, Tetlow and Atkins said those pressures would come alongside other “difficult” choices that Sunak is facing, such as long-delayed pledges to “fix” the nation’s social-care system, pressure to retain the £20-a-week uplift in Universal Credit introduced last year, and state-pension rises.

They said steps to cap the cost of social care could come with a price tag of £10bn a year, while retaining the Universal Credit uplift beyond September will have a £6bn annual impact on Treasury coffers. The “triple lock” guarantee for the state pension will see its cost rise by £4bn from April if Sunak sticks to the letter of the rules, which would demand an increase that keeps pace with the growth in workers’ annual earnings – currently 8.8%.

Pope, Tetlow and Atkins said the provisional plans laid out in the chancellor’s March Budget included “barely enough money to meet demographic-related demand pressures” over the coming three years.

They said more money will be required if the government is to deal with service backlogs resulting from the pandemic and cover ongoing coronavirus-related costs,  such as continuing the NHS Test and Trace programme and vaccination drives.

“If the chancellor wants to address these pressures, while remaining committed not to borrow for day-to-day spending, he would need to raise taxes or find cuts to spending elsewhere,” the authors said.

They urged Sunak to learn from the mistakes of his predecessors, George Osborne and Philip Hammond, and to package any tax increases alongside the measures they are designed to pay for.

“In the past, chancellors have failed to deliver tax reforms because spending increases were announced first, making a standalone tax increase appear less justified to the public when later announced, making it more difficult to deliver,” they said.

They also urged Sunak not to increase National Insurance contributions to pay for social-care reform, arguing that such a move would fall “inappropriately” on those aged under 65 who use the social-care system the least. They said an additional category of income tax levied only on the over-40s would be a preferable option that could be collected from both employees and the self-employed.

Headcount reductions could hamper infrasturcture splurge

Elsewhere in the report,  Pope, Tetlow and Atkins noted that an anticipated capital-spending splurge on projects such as HS2, new roads, housebuilding, hospitals and prisons could be impacted by plans to reduce civil service headcount.

They said that while there is a strong case for borrowing to invest in capital projects when interest rates are low, departments may not have enough properly-skilled staff to oversee an expanded range of schemes.

“Plans pencilled in at the March Budget would see investment spending by departments (known as capital departmental expenditure limits, CDEL) increase by 11%,” the report authors said.

“However, this would not be the first time that the government has tried to increase capital spending quickly and previous Institute for Government research has highlighted some of the problems that have been faced in the past in doing this.

“In the mid-2010s, a desire to spend more on capital projects was undermined by insufficient project managers and other relevant staff in the departments involved. Given reports that Whitehall staff numbers might be cut back at the Spending Review, there is a risk that the government could fall into the same trap and so struggle to increase capital spending by as much as planned.”

The report the IfG was referring to was the suggestion earlier this month that chief secretary to the Treasury Stephen Barclay has told departments to prepare to reverse the increases in headcount that have taken place since 2016, principally in response to Brexit and the coronavirus pandemic.

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