Comment

29.04.19

The state of the Spring Statement

Source: PSE April/May 2019

Ben Zaranko, research economist at the Institute for Fiscal Studies (IFS), analyses this year’s Spring Statement and looks ahead to the Spending Review.

This year’s Spring Statement always promised to be a quiet affair. For starters, it was sandwiched between dramatic votes on the government’s Brexit deal. The fog of uncertainty over the nature of the UK’s future relationship with the European Union is yet to lift. And, following the welcome shift to a single fiscal event each year, major tax and spending announcements are now saved for the Autumn Budget. The chancellor – a politician not renowned for his showmanship – was perhaps never going to make any substantial policy changes under the circumstances.

There was one important announcement missing, however. The chancellor announced that he plans to hold a three-year Spending Review later this year, but once again chose not to confirm how much he plans to spend (what is known as the total ‘envelope’). This is despite his promise to do so last autumn. Given the degree of political and economic uncertainty, his reluctance to commit to multi-year, multi-billion spending plans is understandable.

There is certainly an argument for delaying such decisions until more is known about the Brexit deal – or lack thereof – and its effects on the economy. After all, a key determinant of how much we can afford to spend on public services is the performance of the economy as a whole. The chancellor heavily hinted that should the ongoing Brexit uncertainty be resolved, he will be able to make more money available for public services.

But the continuing delay means we’re none the wiser over how tight a settlement departments should expect. This ongoing uncertainty comes at a cost and most likely impedes the ability of public sector leaders to effectively plan the future provision of public services.

The final envelope is yet to be confirmed, but we’re not entirely in the dark. The chancellor has published a set of provisional, or ‘indicative’ spending totals for the next five years. Under those provisional plans, total departmental spending is set to grow by £17bn in real terms over the next Spending Review period (2019-20 to 2022-23). Both day-to-day and investment budgets are set to grow over that period, by 1.2% per year and 3.1% per year respectively, but will not climb back to their 2009-10 level. It is unprecedented for spending on public services to end a decade lower than it started – particularly while the economy has been growing and demands on departmental budgets have been increasing. But spending is now on an upward trajectory, which the chancellor has pointed to as proof that “austerity is coming to an end.”

However looking within the overall total yields a different picture. Just as departments have not equally shared the pain of the cuts made since 2010, they are not set to equally share the gains as spending increases. The lion’s share will go the NHS: the government has promised an extra £20.5bn in real terms by 2023-24 for frontline services in England alone, with extra for Scotland, Wales and Northern Ireland as a result of the Barnett Formula. The government is also committed to increasing spending on defence and overseas aid in line with the economy. Together, that means that the path for more than half of day-to-day public service spending has already been largely decided ahead of the Spending Review.

Because so much spending has effectively been pre-decided, the size of the envelope will determine how tight settlements will be for other ‘unprotected’ areas. IFS analysis of the Spring Statement has shown that the chancellor’s ‘provisional’ spending totals imply average cuts to areas outside of the NHS, defence and overseas aid of around 0.6% per year over the review period. This would slow the pace of cuts, but not bring them to an end. Should the chancellor decide to deliver spending increases to some services within that ‘unprotected’ total – to schools, say, or the police – he’ll either have to stump up more money or make bigger cuts to everything else.

The chancellor did hint at a post-Brexit spending boost, but he won’t be short of demands for additional funding. After years of tight spending settlements, many public services are showing signs of strain. Even if further cuts are avoided, a flat budget may not be enough to keep pace with growing demand for public services.

Perhaps nowhere is this truer than in local government. In the face of growing funding pressures and ever-rising demand for social care services, increasing numbers of councils are paring back local services to the legal minimum. Extra money to alleviate some of these pressures could be announced at the Spending Review – but would of course need to come from somewhere. And increasing the size of the overall pot of funding for councils is just the start: the forthcoming Fair Funding Review will need to make tough decisions on how that funding should be allocated and redistributed across councils.

Another key issue will be public sector pay. Multiple years of pay restraint in the public sector has led to growth in public sector pay falling behind growth in private sector pay, and the difference between average public and private sector pay has now fallen to below its pre-crisis level. Further pay restraint would likely exacerbate the issues with motivation, recruitment, and retention reported by many public services. But if the government increases public sector pay without providing extra funds, departments would need to make cuts elsewhere, potentially by further reducing the number of public sector workers.

The Spending Review provides a timely opportunity for the government to get to grips with the challenges facing our public services. It also provides an opportunity to open a broader debate about the size and shape of the state. An ageing population and rising costs of service delivery means that spending on health, social care and pensions will almost certainly need to rise in the years to come. Meeting those pressures without raising taxes to increase overall spending would mean an ever-shrinking pot of money for everything else.

Voltaire once quipped that while some states have an army, the Prussian army had a state. On current trends, we are heading for a National Health Service with a state attached. The alternative is to raise more in tax – which raises the question of how, and from whom.

These are the sorts of debates we should be having. Yes, the chancellor’s reluctance to make major policy decisions amid such pronounced economic and political uncertainty is understandable. But these decisions – like that of how much to spend in this year’s Spending Review – cannot be delayed forever.

Top image: PA Wire

 

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