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Stubborn UK inflation is set to squeeze departmental budgets more deeply than expected in the next parliament, putting areas such as transport and justice under long-term strain, according to a leading think-tank.
Departments that are not prioritised under government spending plans face “implausibly” steep real-terms spending reductions, threatening the quality of public services for years, analysis by the Resolution Foundation found.
The think-tank said that per-capita spending on areas that have not been ringfenced by Chancellor Jeremy Hunt could fall by 16 per cent in real terms between the most recent fiscal year and 2027-28. That amounts to a £20bn drop in spending.
The figures underscore the harsh decisions to be faced by the next government after an election expected next year, as surging public debt crushes HM Treasury’s budgetary room for manoeuvre.
Hunt has spoken of “difficult decisions” ahead for public finances as he prepares for an Autumn Statement due on November 22, partly due to rising borrowing costs that are being mirrored by governments around the world.
“As well as causing a huge cost of living crisis, Britain’s bout of high inflation is putting public services, whose budgets were set back in 2021 in cash terms, under huge pressure,” said Torsten Bell, chief executive of the Resolution Foundation.
“The idea that in the long run high inflation and stronger than expected public sector wage growth will not feed through into higher public spending is for the birds. So is the idea that further spending cuts of the scale currently pencilled in after the next election will be delivered.”
In the short term, government borrowing is running at a slower pace during the current fiscal year than was expected by the Office for Budget Responsibility, the fiscal watchdog. Higher cash receipts and lower interest payments mean the government borrowed £81.7bn in the financial year to September, less than the £101.5bn forecast in March.
The slower pace of borrowing will increase the chancellor’s short-term scope for tax giveaways but this will not necessarily extend into more generous spending settlements in the next parliament, according to the Resolution Foundation.
Hunt has focused on ways of boosting the productivity of the public sector as he seeks to squeeze out better outcomes from departments facing tight settlements.
Harriett Baldwin, Conservative chair of the Commons treasury committee, told the Financial Times the analysis underlined how damaging inflation is for the public finances. “The Bank of England has the task of bringing inflation back under control but these figures show how crucial it is that any decisions the chancellor takes do not fuel inflation.”
A former senior Treasury official said there was a risk the election will be fought on a “completely unrealistic” assessment of the future path of tax and spending. “What this country needs is a really honest debate about how — in a world of low growth — we’re going to be able to afford the sort of spending priorities that the average voter takes for granted.”
The government has yet to decide how it wants to divvy up its allocations beyond the next fiscal year, leaving that decision for its next spending review.
However, given the government’s desire to support priority areas including the NHS, defence and overseas aid, think-tanks including the Institute for Fiscal Studies predict that unprotected areas are in line for real-term cuts.
The Resolution Foundation analysis showed how higher-than-expected inflation affects the outlook for government spending, basing its forecasts on this week’s BoE projections.
At the time of the March Budget, spending outside protected areas were facing 11 per cent inflation-adjusted per-person reductions over the period, the think-tank said. It now expects spending in departments including the Home Office, Transport and Justice to fall by 16 per cent per person in real terms from 2022-23 and 2027-28.
A government spokesperson insisted that departmental spending will be about £100bn higher in four years’ time compared with the start of the parliament, even after taking account of inflation.
“But we must break out of the cycle of evermore spending, which is why we are accelerating reform so that front-line workers can focus on what they do best: teach our children, treat us when we’re sick and keep us safe,” they said.
Sir Ed Davey, leader of the Liberal Democrats, said the government should “come clean” in its Autumn Statement and admit that even deeper cuts to the NHS, schools and other vital public services were likely.
