The previous government was guilty of poor policy making, says PAUL JOHNSON
Rachel Reeves is within her rights to feel somewhat aggrieved. It was always clear and obvious that the spending plans she inherited were incompatible with Labour’s ambitions for public services, and that more cash would be required eventually. But the extent of the in-year funding pressures does genuinely appear to be greater than could be discerned from the outside, which only adds to the scale of the problem.
Not all of what we heard should have come as a terrible surprise. At a time when private sector earnings are growing by between 5% and 6% a year, public sector pay awards were always going to come in higher than the 2% budgeted by departments. That is a pressure that was known.
The NHS budget for this year always looked tight, and a winter funding injection for the health service is at this point an annual tradition. The disconnect between the generosity of departmental budgets and what they are being asked to deliver has been clear for some time, even if it was roundly ignored during the election campaign.
Nonetheless, some of the specifics are indeed shocking, and raise some difficult questions for the last government. If the scale of these overspends and spending pressures was apparent in the spring – and in lots of cases, there’s no reason to suppose otherwise – then it is hard to understand why they weren’t made clear or dealt with in the Spring Budget.
Previous Chancellor Jeremy Hunt’s £10 billion cut to national insurance looks ever less defensible. On asylum costs, the decision to effectively stop processing claimants, and to budget virtually nothing for the resultant costs of housing them, looks like very poor policy making. The new Chancellor is right to be cross.
One challenge for the Chancellor is that few of the overspends she has identified are likely to be one-off. Public sector pay increases, for example, are very much permanent. An extra £9.4 billion on the pay bill this year means at least that much in every year to come. That could be enough, when combined with Labour’s other manifesto promises around green investment, to eat up all of the so-called ‘fiscal headroom’ bequeathed to her by Mr Hunt. There will need to be some big fiscal decisions in the autumn. Something will have to give. That was true three months ago and it’s even more true now.
The scale of the challenge was illustrated by the way in which the Chancellor felt forced to cancel investment projects that did not have funding attached That sits a little awkwardly with this government’s commitment to economic growth as its central mission, but reflects cuts in investment spending announced by the last government and it seems to be carried through by this one. The decision not to proceed with social care charging reform, is very disappointing given the long failure to address this issue.
On a more positive note, Rachel Reeves announced some very welcome changes to the spending framework. The root of the problem is that the 2021 spending review set budgets at a time when inflation and public sector pay awards were expected to be in the region of 2% to 3% per year.
Those planning assumptions were blown out of the water, but Treasury allocations have not kept up. Holding a three-year spending review every two years will be an improvement. Moving to a single fiscal event a year is also something we at the IFS have long called for. These technocratic solutions and process changes might not be headline-grabbing, but they are no less important for that.
Paul Johnson is director of the Institute for Fiscal Studies
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