In tomorrow’s Budget and spending review, the chancellor will not deliver the road-map to genuine reform so badly needed by the country
In all likelihood, Rishi Sunak’s Budget and spending review tomorrow will be the most important moment for public policy during this parliament. They will establish the government’s priorities up to the next election by setting out where all the money is going to go. As ever, there has been plenty of pre-briefing, both official and unofficial, which allows us to get a pre-emptive sense of how the jigsaw is coming together even before all the pieces have been filled in.
We know, for instance, that the chancellor has already unnecessarily boxed himself in by insisting on reinstating fiscal rules that were binned during the pandemic. This means that the government has to set a trajectory to stop borrowing money for day-to-day spending within three years. There is a separate rule for infrastructure spending on projects like buildings and roads, which must total less than 3 per cent of GDP a year.
When you hear commentators talking about the chancellor having “little room” for additional spending, it is important to remember that these restrictions are self-imposed. They are not being requested by international financial institutions or major investors. Sunak wants to reaffirm the Conservatives’ political messaging around fiscal prudence in preparation for the next general election – a contest in which his party will, again, attempt to paint Labour as irresponsible with money. Moreover, the Treasury is worried about the impact of inflation on government debt repayment and keen to give itself future wiggle room by applying tough rules to departmental spending.
Where Sunak certainly does have “little room” for manoeuvre is in revenue-raising – this side of the equation having been mostly decided already. An array of tax rises was announced in the March Budget, the most significant being an increase in corporation tax to 25 per cent and a freeze in income tax allowances until 2026.
This has since been supplemented by the announcement of an increase in National Insurance contributions by 2.5 per cent, split between employers and workers. The net effect of all this will be an additional £40 billion a year of tax by 2025/26. No other significant increases are expected tomorrow but there may be a number of “simplification” measures affecting – for instance – inheritance and capital gains tax which will reduce various reliefs, as well as online sales tax, all of which would bring in a bit more cash.
What we do know is that, despite a significant list of departmental demands that would seem to require higher spending, there won’t be all that much to go around. The chancellor has a bit more money available than expected under his arbitrary rules, thanks to the economy recovering faster from Covid restrictions than was initially predicted. Given the scale of the difficulties facing the country over the next few years, however, it won’t be nearly enough.
The government’s problems can be broadly sorted into three buckets. In the short term, there is a cost of living crisis caused by inflation, energy prices and the £20 a week cut in Universal Credit. In the medium term, there is a serious risk to the provision of public services after a decade of cuts – as well as a big, bold question about whether “levelling up” means anything much in practice. In the long term there is the challenge of achieving Net Zero by 2050 and, more broadly, establishing some kind of vision for economic growth in a post-Brexit world.
The short term problem is partly self-imposed. Cutting Universal Credit has put millions of families in a difficult financial position. The Joseph Rowntree Foundation recently published research showing that four million families are already in arrears on their bills. On top of this, households have been hit with a 12 per cent increase in energy costs, with another sizable rise in the energy price cap likely in Spring; and by rising food and clothing prices caused by global supply chain problems and exacerbated by a Brexit-related labour shortage. The Treasury knows full well that the prime minister’s boosterish claims that wage increases will outweigh these other considerations are not true – at least for anyone not driving an HGV.
Sunak is expected to respond to this by increasing the minimum wage to £9.50 and unfreezing public sector pay – but his own MPs are clamouring for more. He may well choose to implement a temporary cut in VAT on energy, which comes with the political bonus of only being possible due to Brexit. However: to really alleviate the pain the most disadvantaged will experience over winter would require structural improvement to our creaking welfare system. It has been suggested that the UC “taper” for additional hours of work should be amended, so that people keep more of what they earn. But even that won’t help families most in need.
No one is expecting significant assistance for this group tomorrow – and if that assumption proves correct, we will see even greater strain on public services that have to pick up the pieces of social failure. Indeed, the pressure on these services is the main medium-term problem facing the government.
Sunak has already announced the health settlement which includes £20 billion over the next two years for the NHS to help the system recover from Covid. In three years’ time this cash for hospitals is supposed to reduce to cover the costs of social care reforms – so people don’t have to sell their homes when moving into residential care. But, as it would be politically suicidal to cut NHS spending in the run up to an election, this decision will almost certainly be revisited.
Either way the NHS will get a much more generous settlement than other parts of the public sector. Schools have yet to be given anything to cover Covid recovery beyond some notional funding for extra tutoring. Yet they are seriously struggling – not just with academic learning loss, but also ongoing pupil absences, and the fallout of a mental health and special education needs crisis exacerbated by the pandemic. To take one scandalous example: the Child and Adolescent Mental Service (CAMHS) now, in most cases, no longer has the resources to take referrals for young people who are self-harming or experiencing suicidal ideation. It is schools that have to manage the consequences: a task for which they are manifestly not equipped.
Elsewhere, local authorities are suffering from years of heavy cuts and struggling to meet a whole host of statutory requirements without going broke. A number of councils, like Croydon and Slough have effectively already declared bankruptcy. The justice system is under serious strain, with a 300 per cent increase in cases delayed for more than a year to be heard. And so on.
If Sunak does nothing to alleviate these problems, it will be hard for the government to argue they’re not “levelling down” – let alone doing anything to lift the nation upwards. There will no doubt be some spending showily allocated to “levelling up” – additional money for transport outside of London has already been announced, though mostly for metropolitan centres like Manchester that have not been “left behind” like many red wall seats.
We have also been told about £3 billion for skills training, some of which has been previously announced, and does not make up the reduction in funding in this sector since 2010. Moreover, this will, to some degree, be counteracted by an expected increase in tuition fee repayments (by bringing the earning level at which repayments begin down to £23,000). This change will affect recruitment to less well established universities in exactly those parts of the country that need extra help the most.
Unless Sunak surprises us all with some big untrailed announcements it’s hard to see how all this amounts to a serious plan for a better country in the years to come. Which brings us to the chancellor’s final and most testing challenge: to offer some kind of vision of a positive future for the long term – even if he thinks we need to take a hit of post-pandemic pain in the short term.
When Dominic Cummings was still in Downing Street there was at least some strategic vision of a high-tech, science-driven economy, albeit not one communicated with any great clarity or sense of realism. But, with Cummings gone, the Treasury has signalled that it will scrap the target of £22 billion a year spent on public sector R&D by 2024-25.
Likewise the Treasury has shown itself conspicuously uninterested in using the Net Zero emissions target to drive investment in technology, promising less than £7 billion a year in this strategy in their recent review. Sunak’s department has also made it clear that they expect the private sector to (somehow) bear the bulk of the £50 billion a year cost, and have refused to exempt green spending from the 3 per cent infrastructure rule.
So if the Brexit wages boom is illusory (as the Treasury privately believes it to be); and “levelling up” is a slogan rather than a serious ambition; and there is no longer a Classic Dom strategy for the UK to become a science superpower – then what is the big idea?
With no coherent policy agenda emerging from Number 10, there is indeed an opportunity for Sunak to set out an alternative. But at the moment it looks like his only message is a repackaged form of austerity, sweetened with few headline-grabbing hand-outs. A tight spending settlement may sometimes be considered a necessary tactic – but even the government’s supporters can’t pretend it’s a plan.
In truth, we’ll probably learn little from Sunak’s speech itself. I certainly won’t be taking the actual numbers at face value. Every chancellor, Labour or Tory, tries to spin a web of distraction by throwing around big numbers that often cover spending over multiple years, or money that’s already been announced. The bad news rarely gets anything beyond a mumbled sentence.
A detailed analysis of the figures themselves requires a forensic search of the published documents. Such an exercise is likely to find that, whatever Sunak claims to the contrary, he cannot provide a lifeline to those worst hit by inflation; nor give much help to public services managing the fallout from covid and a decade of austerity; nor offer much in the way of long term investment. Why? Because the chancellor has chosen the theatre of prudence over the reality the country faces.
Sam Freedman is a Senior Fellow at Institute for Government and a former senior adviser to the Department for Education.
Photograph Jack Hill via Getty Images