Reform analysis: The Chancellor's fiscal statement
Policy Director
Today the Chancellor told Parliament that the state of the public finances was far worse than Labour had expected to find them, and outlined the Government’s response. In our snap analyses of both Labour and Conservative Manifestos, we highlighted that neither party was being realistic with the public about the fiscal pressures government faced.
Rachel Reeves said: “this is not the statement I wanted to give today, and these are not the decisions I wanted to make. But they are the right decisions in difficult circumstances.” Yet the IFS’ Paul Johnson has said “there should not be a sense of surprise that there is a big issue here”.
Here are three things we learned, and one thing we (sort of) already knew.
What we learned 1: A new spending review framework
In Labour’s manifesto, and confirmed in the King’s Speech, we heard about the Government’s plans to introduce a “fiscal lock” into primary legislation — requiring any policy announcements with a fiscal impact of more than one per cent of GDP to be subjected to OBR analysis (unless the measure is intended to last less than two years and is in response to an emergency).
Alongside this, the Chancellor announced that the OBR’s Charter would be revised with the aim of creating more predictability in the way Spending Reviews are carried out. There will now be a requirement to carry out a review “every two calendar years” — and for reviews to cover spending in at least three years of the five-year forecast period.
What this can’t account for, of course, is the fact that disruptions to how regularly these reviews are carried out have, in recent history, been affected by factors outside of the Government’s control. For example, the 2019 Spending Round had to be quickly followed by an emergency review in 2020 to “prioritise funding to support the response to COVID-19”. Likewise the 2021 Spending Review aimed to create a trajectory for economic recovery following the pandemic. Nevertheless, the ambition to “increase certainty” around departmental spending in the medium-term is the right one.
We also heard the OBR will be given “formal” powers to forecast overspends against planned departmental spending. We’ll wait to see what this means in practice though, as our fiscal statement snap analyses often point out, the OBR already states whether there are “risks” to its forecasts implied by government’s spending plans (i.e. whether overspends are likely or not).
What we learned 2: Still no answer to adult
social care
The charging reforms to social care due to be introduced in October 2025 (though, we’re told, without “money put aside” for this purpose) have been indefinitely cancelled — meaning, yet again, a delay to there being a plan to fix the crisis in social care. We’d always argue that a plan for social care must be fully-costed and sustainable in the long-term, but, given that pressures on other public services, particularly healthcare, are exacerbated by a lack of capacity in social care, it’s disappointing to see the can kicked further down the road.
What we learned 3: Cash savings
The Government has announced they will be targeting Winter Fuel Payments only at households in receipt of Pension Credit or a range of other means-tested benefits, which is estimated to save £1.4 billion this year. This is sensible, universal welfare measures are wasteful, and support is best targeted at the worst off.
Then Treasury expects departments to “absorb” (a brilliant euphemism) a large chunk of the “new” public sector pay pressures within their existing budgets, amounting to an additional £3.2 billion this year. While there’s potential for efficiencies to be located across departments, we question whether a top-down approach from Treasury — which, for many will require unplanned spending cuts — is necessarily the best approach to this.
The government has jumpstarted its promise to cut consultancy spend by stopping “all non-essential government consultancy spend in 2024-25, and halving spending on consultancy in future years”, saving up to £680 million in 2025-26. But read the fine print, and you’ll see that to do this they have discontinued the Conservatives’ policy of capping civil service headcount, to create capacity to replace consultants with officials. But this calls into question how much these efficiencies will actually be realised, or whether growth in the civil service will eat away the savings — the workforce was still growing despite headcount caps, and has reached 503,000 full-time equivalents, the largest it has been since 2007.
On top of reducing consultancy spend, the Treasury is expecting a 2 per cent cut to admin budgets across government, saving £225 million this year. But most admin spending is on civil service headcount and programmes, which is difficult to square with the assumption that headcount could expand to fill gaps consultants are currently plugging.
The Government has reiterated their hope that digital technology will further improve the productivity of public services, which has stagnated since 2008. We look forward to reading the Artificial Intelligence Opportunities Action Plan, announced by DSIT for publication in September, which should support this objective.
What we (sort of) already knew — the “black hole”
The centrepiece of the whole statement is the revelation of the “black hole” in public finances which the Treasury team have been briefing about over the last week. The Chancellor assessed the hole in the public finances was £22 billion (which had been expected), but crucially that the gap was not a future problem, but this year.
The Government are blaming the previous Conservative government for having spent the £9 billion Reserve (held back by the Treasury for emergency pressures, and allocated later in the financial year) several times.
Front and centre are spiralling asylum and immigration costs, an additional pressure of £6.4 billion this year, a staggering 40 per cent increase on the Home Office budget which was allocated in the Main Estimates published this very month. Military assistance for Ukraine (an unfunded pressure of £1.7 billion) and support for the rail industry (£2.9 billion) also feature.
But the largest spending pressures are choices — the Chancellor’s decision to accept the recommendations of independent pay review bodies for 2024-25. Reeves briefed last week that there was also “a cost to not settling” public sector pay, but the costs to settling are considerable — an additional £9.4 billion this year. Average public sector pay is still higher than it is in the private sector, and over the course of 2023 earnings for both decreased in real terms because of high inflation. Unless the economy begins to sustainably grow again, we cannot afford the precedent of growing the pay bill faster, meaning the public sector takes on a bigger and bigger proportion of the economy.
Any good news?
The Chancellor’s final warning was that these measures were not enough in the long term, and that the “Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax”. Given she repeated from the despatch box that the Government would not increase National Insurance, basic, higher or additional rates of Income Tax, or VAT, the burden may fall the hardest on other taxes, such as capital gains . But a deep raid on taxes which reward long-term investment and saving risks the Chancellor’s most fundamental claim — that “economic growth is the only way to sustainably improve our public services”.