Treasury spending chief sounds alarm on inflationary pressures facing departments

Cat Little says some parts of government are “struggling” to evidence the impact of spiralling prices
Cat Little. Screengrab: Parliament TV

By Jim Dunton

22 Jul 2022

Political and media coverage of the UK’s spiralling inflation rate fixes on the cost of living for consumers, but MPs have been given a stark warning about the impact of rising prices on government’s operations.

Members of parliament’s Public Accounts Committee were this week told that departmental finances are also facing significant uncertainty and that briefings on the issue would be a priority for Boris Johnson’s successor as prime minister and their new government in September.

HM Treasury director general for public spending Cat Little gave evidence on accounting-officer assessments on Monday, which heard that materials price rises of 23% in the past six months posed a real threat to the delivery of major projects.

Little said the figure, given by Infrastructure and Projects Authority chief executive Nick Smallwood, was part of a wider picture of instability affecting government’s core operations.

“It is not just major programmes,” she said. “We have big pressures just on basic running costs and particular pay costs within government. All of that has to come together.

“When a new administration are in place, it will be one of the first things we run through to say, ‘Look, this is what we estimate the total pressures bearing down on departments to be, given that we set a nominal budget against real terms spending increases’.”

Back in March, independent think tank the Institute for Fiscal Studies warned that then-chancellor Rishi Sunak’s failure to increase funding for departments in his Spring Statement in the light of rising inflation had effectively wiped 10% off the value of three-year settlements agreed in October.

At the time inflation as measured by the Consumer Prices Index was 6.2%. The latest figures – published by the Office for National Statistics earlier this week – show CPI hit 9.4% in June, and the Bank of England has projected it will rise to 11% later this year.

Different parts of the economy are subject to different inflationary pressures, however CPI is an important benchmark for staff pay.

Little told Monday’s PAC session she was particularly concerned about parts of government that are unable to properly assess how prices rising at the levels currently being experienced will affect their work.

“I would not want anyone to think that this is all managed and fine,” she said. “There are some really big inflationary pressures facing all departments and all programmes.

“The IPA has done some fantastic work in trying to evidence as much as we can, but it is really early days, and what I am really worried about is where departments are struggling to evidence what the impact is.

“Some programmes have not yet got to a commercial negotiation or a milestone in the programme that allows them to quantify what the inflationary impact is, so this is ongoing work and we are expecting to have a further update in the autumn to better assess and quantify that impact. But this is far from easy and far from fully gripped.”

Little’s stark observations were highly unusual for a senior official at a select-committee evidence session, not least because they did not follow a question posed directly to her. Instead, she sought permission from committee chair Dame Meg Hillier to expand on comments the IPA’s Smallwood made in response to a question on the impact of the current level of inflation on major government projects.

Committee member Nick Smith had asked how inflationary pressures would affect the affordability of major programmes and how departments could manage the risk.

Smallwood responded: “It is a very real issue. It is beyond a risk; it is reality. We are seeing 23% inflation on materials in the last six months. There is a risk that that will fall over into the resources used to deliver our big projects, and so you have to really be focused on having robust delivery plans, long-lead procurement of the critical materials if that is possible, and looking to offset any inflationary pressures by being more productive.”

Later in the session Little told PAC members that the availability of some construction products was an obstacle to a longer-term procurement stance to support major projects at a time of rapidly-rising prices.

“Even though the materials have gone up in price, the quantum that we can get our hands on and actually into situ to use as part of construction has been challenging,” she said.

“We also have some difficult labour market challenges. We have to build quite a complex set of inputs to advise ministers in the autumn, but all of that work is under way jointly with the IPA.”

Monday’s PAC session made only brief reference to pay for departmental staff, however last week the civil service’s biggest union set dates for a strike ballot over the government’s 2%-3% pay offer for the current year.  PCS is seeking a 10% rise for staff, which could well be below the prevailing CPI rate by the time the vote takes place, from late September to early November.

This week the Cabinet Office rejected proposals made by the Senior Salaries Review Board for Senior Civil Servants to get an across-the-board pay rise of at least 3%. Instead it opted to table a 2% rise.

Lucille Thirlby of the FDA union said ministers were treating their own staff “with contempt” and setting them apart from other public-sector leaders they work alongside who are looking at pay rises of between 3% and 4.5%.

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