Jeremy Hunt has paved the way for a renewed period of “implausible austerity” after announcing deep real-terms cuts to public spending after the next election.
Hunt has projected day-to-day departmental expenditure increasing by an average of just 0.9% in real terms from 2025, with public investment spending fixed in cash terms, leaving a future government with a “stark choice” between further tax rises or making deep cuts to public services.
The Office for Budget Responsibility (OBR) appeared to cast doubt on the feasibility of the government’s tight post-election spending plans in its assessment of the chancellor’s autumn statement.
The OBR warned persistently high inflation would slash the real value of government departmental spending by £19.1bn by 2027-28, compared with its estimates from the spring.
The watchdog made clear that would “present challenges”, including for local councils. It pointed to the fact that demand for public services is expected to grow and warned that local authorities’ abilities to borrow and spend would be constrained.
Outside ringfenced areas, such as the NHS, defence and schools, it warned spending for unprotected departments would need to fall by 2.3% a year in real terms from 2025-26 if the government maintained its current plans for funding public services.
Torsten Bell, the chief executive of the Resolution Foundation thinktank, said Hunt’s giveaways relied on “implausible austerity”. He added: “The giveaways announced today are funded by handing whoever wins the next election implausibly large spending cuts. Tax cuts to boost business investment are welcome, but undermined by plans to cut public investment by over a third – it’s hard to think of a more anti-growth policy.”
The state of Britain’s local authority finances have been under scrutiny after a string of high profile struggles, including the effective bankruptcies at Birmingham city council, England’s largest local authority, and the travails in Woking, the Surrey town forced to make sweeping cuts.
The OBR noted that there had been 11 section 114 notices – which signal that an authority does not have the resources to meet forecast spending in the following year – since 2018, compared with just two in the previous 18 years.
“Given local authorities’ statutory duty to provide a range of services where demand is likely to continue to grow, for example adult and child social care, pressure on local authority finances and services will continue,” the OBR said. “Performance indicators for public services continue to show signs of strain, for example the backlog in crown courts reached a record high of 65,000 in August.”
It said “delivering these spending plans while maintaining or improving public services would require significant improvements in public sector productivity”. An update to a Treasury scheme on productivity, published alongside the chancellor’s statement, identified the use of artificial intelligence and cutting administrative tasks for frontline workers as an area for improving productivity.
Shaun Davies, the chair of the Local Government Association, said it was “hugely disappointing” that Hunt had not set more funding aside for councils. “Supporting businesses, and easing the cost of living for households is important, but not if our public services continue to be chronically underfunded and unable to be there to support people when they need them,” he said.
The OBR said local authority spending had fallen from 7.4% to 5% of GDP from 2011 to now, and forecast this would fall further, to 4.6% by 2028-29.
Locally financed spending is expected to fall by £300m over the next four years. Meanwhile, borrowing to fund investment, which peaked at £11.5bn in 2019-20, is expected to fall to £7bn by 2028-29.
The watchdog said that the wider impact on central government spending from the councils crisis has so far been small, as authorities had been allowed to reallocate long-term funding to day-to-day spending, or increase council tax rates.
Tom Smith, the director of economic policy at the Tony Blair Institute, said: “Whoever wins the election next year will face a stark choice between steep cuts to unprotected public services, or more tax rises to help restore them.”
Nick Davies, the public services programme director at the thinktank the Institute for Government, said: “Public services posts that are currently empty will be left unfilled. IT systems and buildings will not be upgraded. It means the slow, steady and continued erosion of public services.”
It follows the recent approach taken when the government refused to cover the cost to the NHS budget of recent strikes, Davies said.
The government is attempting to hold firm on funding key areas, with core school spending per pupil held flat in real terms, and NHS spending planned to grow 3.6% a year.
Zoe Watters, a public sector infrastructure partner at PwC, said: “Major projects like hospitals and prisons, where private capital isn’t considered acceptable, are likely to need to be redesigned for a slimmed budget.”
