From https://samf.substack.com/p/hiding-from-reality, 6 March 2024
This post is not going to discuss the individual measures in the budget. There is no point. You might as well worry about the window boxes on a house that has half fallen into the sea.
Jeremy Hunt, highly constrained by his own party, chose to ignore reality, but that doesn’t mean the rest of us have to. He is continuing to pretend that it will be possible, after the election, to hold revenue spending increases to 1% a year for four years and to cut capital spending by almost 10%. This is untrue and he knows it is untrue. Not only does it assume that departments that have already taken the brunt of austerity can take yet another wave of cuts equally as large, but also that the vast array of demand pressures – an aging and more sickly population, the rising threat of Russia, climate change – don’t exist.
Labour have chosen to go along with this for the sake of electoral expediency. This is a lesser crime. After all they didn’t get us to this point, nor did they create a media determined to frame every hapless manoeuvre by a dying government as a clever trap for their opponents. But still they also know that these figures are a fantasy, and have chosen to play along regardless.
We often talk about “disaffected” or “disillusioned” voters as if they’re other people. Those who don’t spend much time thinking about politics. But if this is how our main parties are going to treat these critical questions about our future then I’m disaffected and disillusioned. Though it should make us angry not apathetic. The irony is that they behave this way because they think voters can’t handle the truth and, at the same time, wonder why trust in political parties has fallen to its lowest ever level.
So in this post, rather than comment on the marginal fiddling around announced today, I’m going to do something I hope those interviewing politicians during this long and painful election campaign start doing - get into some forensic detail about what the spending projections set out in this budget would really mean. And force politicians to acknowledge what they are actually proposing rather than whiffling nonsensically about some tiny amount of money spent by councils on diversity training.
How the cuts would break down
The government has claimed spending will increase by just 1% a year for the next four years. What would this mean in practice? The figure refers to “RDEL” spending only – which is planned day-to-day spending by departments. It does not include capital, which I’ll come on to, or less predictable spending like welfare which is classified as “AME” (annually managed expenditure).
There are two key contextual points needed to understand why this is even harder than it looks. The first is that high inflation has meant that we’ve already had a substantial cut in public spending over the past two years, which is one reason why everything is in such a mess. And the second is that the population is growing more rapidly than expected because of higher migration, which means per capita spending is not projected to increase at all in the next five years.
The effect of an inflationary cut followed by zero growth can be seen in this OBR graph. The purple line shows the current plan.
If things were going really well this might be possible. But things, you may have noticed, are not going at all well. Let’s take a look at what it would actually mean to hold spending like this. This is how much “RDEL” is being spent by each department this year.
You can see the problem straight away. Two thirds of this pot is accounted for by health, education and defence and the government has either explicitly or implicitly pledged that spending in each of these departments will rise by more than 1%.
They have signed up to a workforce plan for the NHS that means an implied 3.6% increase in health spending for each year covered by the forecast. It’s hard to argue that isn’t needed given the state of the NHS, and projecting higher demand, though staff increase alone will not solve the problems. That figure already assumes productivity gains of 1.5-2% - which are double what was achieved between 2010 and 2019.
Ministers have also promised that defence spending will rise to 2.5% of GDP. But even if we assume it stays at 2% of GDP, and they won’t meet this pledge, that still requires an annual increase in the defence budget.
As for education the government have pledged to expand childcare provision with a price tag of (at least) £5 billion a year. Plus there was promise in 2021 that school spending would stay at current levels.
Take all this into account and you’re left with an annual 3.3% cut to the other departments that make up the remaining third of spending. Or more than 13% cumulatively over the four years of the forecast.
When you look at the departments that would have to take this hit they are the ones that have already been hammered by austerity. Putting aside Scotland/Wales/NI which, more or less, go up and down in line with budgets in England the three largest departments are local government, home office and justice.
What would a 13% cut mean for these departments?
Almost all of the local government RDEL spending goes straight out the door in grants to councils. These grants have been cut by almost half since 2010 already. In part they’ve been replaced with higher council tax bills but council spending power has reduced by around a quarter on average. This is at a time when the costs of their main statutory responsibilities - social care and children’s services - have been shooting up.
The consequences are now becoming unignorable. Birmingham’s dramatic bankruptcy - with £100 million of cuts planned to children’s services alone plus a 21% council tax increase over two years – has highlighted how bad things have become, even if, in their case, a horribly mismanaged equal pay dispute has contributed. At least ten other councils have asked to be allowed to sell more assets or borrow more money to avoid their own bankruptcies. The idea of a further 10% cut is laughable.
What about the Home Office. Well 70% of their budget goes to the police. The government tried cutting police officer numbers in the last austerity wave and then that had to be undone when it turned out to be unsurprisingly unpopular.
Most of the rest goes on border control and asylum. This budget has been increasing a lot, partly due to a genuine increase in small boat arrivals, and partly because of a load of pointless spending on Rwanda (which the National Audit Office noted could rise to almost £600 million this week). Plus the decision not to process any new arrivals has left tens of thousands in permanent limbo at taxpayer expense. Asylum spending has been theoretically slashed for the next financial year but in practice the Home Office will need another bailout, as they do every year.
There is a potential saving here if Labour speed up processing and scrap Rwanda. But you would have to more than halve the asylum/borders budget to cover the Home Office’s 13.3% cut and that’s obviously not plausible.
The Ministry of Justice is in an even worse state. Their spending is split into three main blocks. Half goes to prisons and probation. The prison population is projected to rise by 15,000 over the period so no possible chance of cuts here (unless you’re willing to radically change sentencing laws). Likewise probation is going to see a increase in numbers and is still in a complete mess from Chris Grayling’s disastrous attempt to privatise it.
The other half is mostly split between courts – which have a record backlog of cases to the point rape trials are collapsing on a regular basis – and legal aid which has already been slashed since 2010. That is now almost certainly now costing us money. The inability to get advice leads to more cases going to court as a lot more people try to represent themselves in family courts and tribunals, which creates havoc. According to The Law Society the number of legal aid cases to help people get the early advice they need dropped from almost a million in 2009/10 to just 130,000 in 2021/22.
Take out these three departments and you are left with about £50 billion of spending across everything else – including the foreign office, HMRC, transport and DWP (essentially job centres). To get all your savings from these departments they’d each have to be cut 40%, which is obviously infeasible.
50 years of underinvestment set to continue
In anticipation of the budget I wrote, a few weeks ago, about how Chancellors had, for fifty years, used a series of accountancy tricks to keep the tax burden lower than comparable countries. This has led to sustained underinvestment in the public sector, which is a major cause of low productivity.
Despite this the budget proposes cutting capital spending by 8.6% in the four years after the election. This is how capital spending currently breaks down by department.
Here the three largest budgets are transport, defence and science.
Half of transport’s capital goes to the railways, including the ongoing debacle of HS2, which is still set to cost £68bn even though trains will now go slower, with less capacity, between Birmingham and Manchester. Based on previous experience costs here will only rise, especially as there is no viable plan for Euston at the moment. The rest is mostly for roads and if there is one word you hear more than any other in focus groups right now it’s “potholes”.
Defence capital is uncuttable due to the GDP commitment plus the fact procurement is in an even worse mess than ever, and we are having to restock equipment given to Ukraine.
Science is our national research budget plus contribution to the Horizon scheme.
As for the other reasonable sized budgets: we can’t cut energy infrastructure if we are remotely serious about net zero; schools and hospitals have a £20 billion maintenance backlog already; and councils are already having to sell off assets to stay solvent.
It is blindingly obvious that investment spend needs to go up a lot. Indeed it is the one of the few ways to drive the necessary improvements to productivity that will stop revenue costs in health, social care, and so on rising inexorably. There will be a lot of pressure on Labour to adopt a fiscal rule that treats capital spending differently.
The importance of scrutiny
I set all this out in detail not because I think it’s going to happen. As I’ve said before post-election tax rises are inevitable, as is higher spending than currently planned. This IFS chart neatly illustrates what’s coming – the tax burden is persistently cut or held flat before elections and then raised just after. The extent of these rises will depend on whether forecasts improve or deteriorate over the coming year, but they are coming.
My hope is that setting all this out will encourage some serious scrutiny of these proposals. Neither government ministers nor Labour spokespeople should be allowed to get away with a commitment to high level figures without being pushed on what they mean in practice.
If Ministers are not properly challenged there is a real risk that, as the government get more and more desperate over the course of this year, they decide to hold yet another “fiscal event” in the autumn, before an election, and try yet another round of unaffordable tax cuts. That would only make a grim situation for an incoming government even grimmer. It is critical that they don’t feel they can get away with it again.
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