Government departments face brutal spending squeeze

Whitehall departments and government infrastructure projects are facing a brutal spending squeeze in coming years as Rishi Sunak’s government seeks to fill a £55bn fiscal hole.

Chancellor Jeremy Hunt warned the UK faced “difficult decisions on the public finances” as he set out measures in his Autumn statement that implied spending will be throttled back from 2025 when the current spending review period expires.

Before then, Hunt said Whitehall budgets would be protected in cash terms, but he acknowledged departments would have to “make efficiencies” as inflation running at a 41-year high eats into the real-terms value of their budgets.

Thomas Pope, deputy chief economist at the Institute for Government think-tank said that by 2027-28, annual day-to-day spending in Whitehall departments would be £20bn less than it would have been without Hunt’s announcement. Spending on capital projects will be £15bn a year less by 2027-28.

“We don’t know which departments are going to lose out, but it implies incredibly tight spending in historical terms beyond 2025, and a return to the kind of budget restraint we saw in the second half of [former chancellor] George Osborne’s austerity decade,” he added.

The combination of high inflation until 2025, followed by three years of effective spending cuts, is expected to land hard across all government departments. They are already struggling to meet rising wage demands, backlogs caused by Covid-19 and reduced capacity from the austerity cuts that followed the 2008 financial crisis.

Although core departments including health, education and defence received a measure of protection, experts warned service users and frontline staff would be feeling the pinch even before the future cuts started to bite.

While schools received an unexpected spending boost of £2.3bn annually in the next two years, experts warned the money would not translate into increased spending power but would be mostly absorbed by higher salary and energy bills. Real-terms per-pupil funding will remain below 2010 levels until next year, according to the Institute for Fiscal Studies think-tank.

Universities and businesses that had feared cuts, also welcomed a recommitment to spending £20bn on research and development by 2024-2025.

The NHS received about £6bn more over two years, alongside a funding boost for social care that should deliver 200,000 more care packages over two years. The aim is to relieve pressure on hospital beds caused when fit elderly patients cannot be discharged because of a lack of community support.

Hunt described the social care offer as “the biggest increase [in funding] under any government of any colour in history”, but experts and health leaders questioned whether the settlement would spare the service from harsh choices.

Jennifer Dixon, chief executive of the Health Foundation, a charity, said the settlement would still leave the NHS doing no more than “treading water” rather than improving its performance.

The chancellor pledged to keep the UK’s Nato commitment of spending 2 per cent of GDP on defence but deferred a decision on a promise by former prime minister Liz Truss to increase spending to 3 per cent in the light of the Ukraine conflict.

Professor Malcolm Chalmers, deputy director-general at the Royal United Services Institute think-tank in London, said the cash-terms freeze for the defence budget was equivalent to an 8 per cent real-terms cut over three years.

Plans to return overseas aid spending to the target of 0.7 per cent of GDP will now not be met; instead it will be held at 0.5 per cent until at least the end of 2028, with almost a quarter of its already-diminished £11.5bn budget spent in the UK supporting a recent influx of refugees.

The grim outlook is also expected to impact infrastructure projects and the delivery of the government’s signature “levelling-up agenda”, which was designed to narrow the UK’s regional economic inequalities.

While the chancellor announced some largely cost-free policies to advance levelling-up, including increased spending powers for some regional mayors, local authorities said they were already struggling to deliver projects in the light of rising costs.

The left-leaning think-tank IPPR said £1 in every £13 allocated through levelling-up capital funds would now be lost to inflation.

A decision to allow local authorities to raise council tax by up to five per cent was also criticised because it raised more funds in wealthier areas than poor ones. The Labour mayor of West Yorkshire, Tracy Brabin, said the policy was “taking aim at levelling-up”. 

Hunt committed to proceeding with large-scale infrastructure plans such as the new HS2 high-speed railway to Manchester and the Sizewell C nuclear power station, but Whitehall insiders said the fate of future projects was far more uncertain.

Noble Francis, economics director at the Construction Products Association, a trade body, said the statement implied “substantial” real-terms cuts for public sector infrastructure given that construction cost inflation is running at double-digits.

Pope at the IFG said non-core departments such as the Ministry of Justice and the Home Office were likely to bear the brunt of effective cuts, although it was too soon to say where exactly the axe would fall.

Vulnerable projects would include, for example, the justice ministry’s £3.8bn prison building programme — the biggest in more than a century — which was instituted to build up to 20,000 additional prison places by the mid-2020s.

Andrew Neilson at the Howard League for Penal Reform, a prison reform charity, said the government should introduce policies to lower prison numbers in the light of the budget squeeze. “What money is available could then be invested more wisely, to ensure a safer and more sustainable criminal justice system,” he said.

FT Reporters: Peter Foster, Jennifer Williams, Bethan Staton, Sarah Neville, Jane Croft, Jasmine Cameron-Chileshe, Robert Wright and Jude Webber