The row over paying for social care with national insurance increases foreshadows a daunting series of questions the chancellor must answer before this autumn’s spending review
Spending reviews are the most fraught of Whitehall rituals. In early summer, departments receive a summons from the Treasury demanding a set of three-year budget scenarios, which typically range from brutal to catastrophic.
The departments dutifully reply with a set of scenarios that would involve various decisions that any sane minister would consider politically suicidal. When I was at the Department for Education (DfE) we once submitted a response explaining that, of course, we could meet the most eye-watering cuts option – but only if we split the school day in two, so that children could attend either in the morning or afternoon. This first response is known as the “bloody stumps” submission.
There then follows a series of protracted negotiations, undertaken mostly by civil servants and advisers. The senior DfE officials in my day called this bit of the process “monkey tennis”. Eventually, as decision day draws near, ministers get involved, and their personal relationship with the prime minister and chancellor tends to decide how well their department does, relative to others. In the 2010 spending review, our schools budget was saved, largely because Nick Clegg decided to make it his main priority for the negotiations – leading to a memorable call during which Michael Gove (then education secretary) offered to kiss him.
This autumn’s spending review promises to be even more painful than usual. The last full review was completed in 2015, and quite a lot has happened since then. The combination of Brexit and the pandemic has sucked up the vast majority of Whitehall’s energy in the years since, with two consequences.
First: the national finances are in a parlous state, with £340 billion spent on Covid measures, on top of the reductions in GDP over the past two years, and the Brexit-related hit to income. Secondly, a whole range of policy problems, from social care to child poverty and school reform to climate change, have been left to fester for years with no serious investment of time, money or thought.
In the March Budget, Rishi Sunak made no allowances for additional spending for any of the major challenges on the government’s plate. There was not even extra Covid money beyond March 2022 – even though the Office for Budget Responsibility has estimated an ongoing £10 billion cost for test, trace and other measures.
Nor was any extra cash earmarked, beyond previous spending plans, for the NHS, despite predictions that up to 14 million people could be waiting for treatment by the middle of next year – a consequence of the lengthy delays to treatments and people avoiding GP surgeries during the pandemic. Apparently, Sunak and health secretary Sajid Javid are on the verge of agreeing an increased settlement that will at least keep the NHS running.
But this is just the tip of the iceberg. Many local authorities, which have suffered huge cuts over the past decade, and been hit again by the pandemic, are in serious financial trouble.
There is an aggregate £3 billion black hole in their finances, as further cuts to social care, children’s centres and transport services take their toll. Some are on the verge of bankruptcy and reliant on emergency loans.
Schools are having to deal with the fallout of Covid learning loss, with the burden falling hardest on those in the most disadvantaged areas (as we saw in the recent A-level and GCSE results). The Treasury’s refusal to cover the cost of Sir Kevan Collins’ education recovery plan means that there is more pressure in this spending review to provide catch-up help for pupils.
Then there are the sectors like transport and the arts, where Covid will continue to have a negative impact well into next year. Billions have already been spent supporting railways, the tube and airlines. It’s hard to see that nothing else will be necessary beyond March 2022.
To be clear: all of this extra spending that has not yet been committed is just to maintain a basic level of services following the disruption of the last two years. There are also a whole range of policy areas badly in need of additional investment to avoid crisis in the near future.
The most discussed of these is social care – which the PM promised to resolve in his first Downing Street speech. A solution is available in the decade-old Dilnott Review, which proposed introducing a lifetime cap on care costs for any individual, with the balance met by the state.
The cost though, would be at least £7-10 billion a year – hence the row of recent days about whether to raise national insurance to cover it. There has been widespread criticism, including from within the Tory party, of the idea that the best way to fund further support for social care (mostly needed by the elderly) is a tax that hits younger workers. Moreover, any plan that provides additional funding, without dealing with the huge staff shortages in the sector, isn’t going to help much anyway.
The crumbling welfare system has enjoyed less attention than social care, but is potentially an even bigger crisis in waiting. The number of children in poverty had increased by a million in the six years before the pandemic. The poorest ten per cent of families have already seen their income fall by 16 per cent since 2010, and record numbers are reliant on food banks.
With the two-child benefits cap and the overall cap on universal credit and housing benefit now starting to bite hard, and the extra £20 a week provided via UC during the pandemic ending this month, these numbers will only grow. Making our welfare system viable again would be expensive – even just keeping the extra £20 a week would cost £6 billion a year.
But the long-term costs, both financial and ethical, of allowing millions of people to live in destitution will be far greater. A failure to support people now will mean a future of ballooning crime, care and health costs. And a tragic loss of potential.
Then there’s the prime minister’s somewhat vague aspiration to “level up” the country, and to reward the northern and midlands constituencies that gave him such a healthy majority. There is no doubt that economically these regions have been left behind while London and the South East have enjoyed substantial growth (albeit at the price of extortionate housing costs). So far there has been little indication of what “levelling up” might mean in practice. It’s hard, though, to see how any plan could come without a significant price tag.
The PM has also committed to the UK to becoming “net zero” in terms of carbon emissions by 2050, as part of the global attempt to tackle the existential crisis of climate change. Yet the independent Climate Change Commission estimates that this will require up to £50 billion of annual expenditure by 2030, to make the promise a reality.
And this is hardly an exhaustive list. There are dozens of other smaller but still important problems that require investment. To name one: the Child and Adolescent Mental Health Service is falling apart, with children having to wait well over a year for appointments, assuming that their application isn’t simply rejected.
A spending round with so many potential priorities – all of them genuinely urgent – at a time of such fiscal precariousness, would be tough to manage even if the prime minister and the chancellor were on the same page. But it is increasingly apparent that they aren’t. The personal enmity between them may be exaggerated in the press, though Johnson is hardly thick-skinned enough not to be upset by Sunak’s popularity. But their instincts could not be more different.
The PM’s primary motivation is to be liked. He is notoriously bad at difficult conversations or tough decisions and has the frustrating tendency to agree with whomever he is talking to. He has never been an instinctive fan of austerity, since that tends to upset people. In a meeting during the David Cameron-George Osborne era of fiscal conservatism I watched him compare government cuts to the bombing of Dresden, while various panicked officials flapped around him.
Sunak subscribes to a more classical liberal Tory ideology, preferring low taxes and lower spending to growing the state. This matches the Treasury’s sincere concerns about the levels of ongoing borrowing – in June debt repayments hit their highest level since records began.
The chancellor may have a little more room for manoeuvre than anticipated in the Budget, thanks to the economy rebounding faster than expected. But the projected deficit next year is already over £100 billion, even without any of the new spending commitments listed above.
We had a preview of how this clash of styles will play out during the internal debates over Sir Kevan Collins’ £10 billion proposal for school catch-up funding. Johnson initially pushed Sir Kevan and the DfE for ambitious plans. Then signed off on the spending. Then overturned his own decision following a private pizza dinner with Sunak, the night before the announcement was due to be made, leading to Collins’ resignation in June. We were also supposed to get an announcement on social care before the summer recess, but it was delayed after disagreements on the NI increase, and is now apparently due this week – with negotiations going down to the wire again.
If every issue on the table this autumn gets the same sort of treatment we will see the most chaotic spending review yet, and with so many decisions critical to Britain’s long term success such a prospect represents a huge risk to the country. More immediately: the end result could determine how the rest of this parliament plays out and whether Boris Johnson will be there by the time of the next election.
Sam Freedman is a Senior Fellow at Institute for Government and a former senior adviser to the Department for Education.
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