Office for Budget Responsibility chair Richard Hughes has told MPs that departments will need to make “significant” productivity improvements of multiple percentage points if the spending plans set out in the Autumn Statement are to be met.
Hughes also told members of the Treasury Select Committee today that the watchdog was unable to say whether the five-year figures produced by chancellor Jeremy Hunt last week are plausible.
Hunt’s package of measures set out reductions in national insurance but did little to increase already-agreed departmental spending power at a time of higher than anticipated inflation.
Hughes was asked directly about the magnitude of productivity improvements that departments would need to make in order to keep within their budgets at this morning’s session.
“Significant ones,” he replied. “Percentage points' worth of improvement in productivity because that is what are the implied real cuts in some particular areas.”
Hughes told the session that so-called “unprotected” departments – those whose spending the government has not committed to increase in real terms – were now facing real-terms cuts to their budgets of “more than 2%”.
He added: “Because the distribution of reductions in spending is so different across departments, some areas will have to find very significant improvements in productivity if they are going to maintain services.”
In the Autumn Statement Hunt also set out a target to increase public-sector productivity by 0.5% a year. Hughes was asked how realistic it was to increase productivity across public services.
“It has to be delivered,” the OBR chair said. “In the sense that we have an ageing society. One in which more and more citizens are going to be consuming, in particular, healthcare and social care.
“Without productivity improvements in those services just by dint of the number of people who are going to be demanding those services versus the number of people who going to be available to deliver them, there are going to have to be productivity improvements if those services are going to be affordable.
“If you don’t see unit-cost improvements in the cost of providing healthcare, we just don’t have an affordable welfare state.”
The OBR’s Economic and Fiscal Outlook report, published alongside the Autumn Statement, said public-sector productivity remains around 5% below pre-pandemic levels. It added that raising productivity by 5% would be the equivalent of a £20bn boost to funding for departments.
Hughes was asked directly how realistic he believed the chancellor’s funding plans are.
“We don’t know whether the government’s figures are plausible or not,” he said.
Hughes said that the government only provided vague figures for the years beyond a spending-review period, and the current one ends in April 2025.
“Because he hasn’t provided any detail on the choices required to meet those numbers, we don’t know whether they’re plausible or not,” Hughes said of Hunt’s figures.
“It is an unusual feature of our system that the government doesn’t tell us anything in detail about its spending plans beyond a spending-review period.
“What it leaves us having to do is essentially a simulation exercise, which is to take the overall envelope for public spending, take what the government is committed to do in particular service areas like education, like health, like defence. And then try to interpolate what that means for the rest of Whitehall in terms of real cuts.”
He said that by implication departments whose budgets are not protected are facing a “very tight squeeze” and that the lack of forward-looking detail on the magnitude of the pressures was a problem for planning.
“The fact that you leave it quite late to then set those budgets means it is then harder for individual departments to then plan on the basis of delivering them and make the decisions they need to make,” he said.