Government plans further austerity ​‘by stealth’

Despite claims that austerity is coming to an end and the Chancellor stating that there is ​“light at the end of the tunnel”, new analysis from NEF reveals that services without spending protections could face further austerity after a decade of cuts. This includes vital areas of service provision that are now facing a continuation of cuts over the next five years (from 2019/​20 to 2023/​24):

• Prisons are facing cuts of £70 million per year by 2023/​24, compared with 2019/​20
• Public health (which covers things like addiction services) could be cut by £80 million per year by 2023/​24
• Housing and planning (including schemes to incentivise building new homes and homelessness prevention) risk cuts of £30 million per year by 2023/​24

The analysis further shows that government could meaningfully end austerity when the total amount of money available for the 2019 Spending Review is announced at the Budget this autumn. NEF modelling has demonstrated that the Treasury has room to borrow more even within its own deficit targets, while there is also the potential to raise tax contributions from the most well off.

The new research is the first in a series from NEF about the 2019 Spending Review. It uses NEF’s new departmental spending model to project forward and simulate different government spending review settlements across three illustrative scenarios. Together, they show government has the space to either meaningfully end austerity, or even go further and reverse some of the harm caused in recent years.

The three scenarios the report looks at are: a ​‘core’ scenario, projecting forward the most likely government plans at this point in time; a ​‘maintaining standards’ scenario, setting out new funding to prevent a further deterioration in services; and an ​‘improving outcomes’ scenario, which provides additional resources to recover some of the ground lost since the onset of austerity in 2010.

• ​‘Core’ Scenario: Outside of the NHS, if government rolls forward its current protections for areas such as police and science, then things like prisons and public health could see an average real terms cut of 2.1%, or 4.1% per capita, during the first half of the 2020s.
• ‘Maintaining outcomes’ scenario: Our illustrative scenario for keeping up with demand pressures across all health, adult social care and schools services would require annual department spending to be 4% higher, or £14.6 billion, by 2023/​24, compared to our projection for current government plans.
• ​‘Improving outcomes’ scenario: Our illustrative scenario for reversing some of the damage caused by austerity across all health, adult social care and schools would require annual department spending to be 10% higher, or £31.8 billion, by 2023/​24, compared to our projection of current government plans.The research further demonstrates these illustrative scenarios are entirely fundable, given the right political and policy will. Even within the government’s current deficit targets there is scope to borrow a further £24.1 billion per year by 2023/​24. Changing the deficit target to focus on day-to-day spending only – similar to the early rules adopted by the coalition government – then annual borrowing could rise by up to £31.2 billion by 2023/​24.

Alfie Stirling, Head of Economics at the New Economics Foundation, said:

“The decade of austerity so far has arguably been the worst policy error in a generation. As a consequence, the economy has suffered substantially. If the chancellor fails to take the opportunity to learn from the lessons of the past by taking action at the Spending Review, we could be living with the consequences of deteriorating service quality and lost living standards for years if not decades to come.”

Sarah Arnold, Researcher at the New Economics Foundation, said:

“Austerity has decimated our public services. It is time to move on from this failed experiment that has ruined lives. But even though the government has talked about ​“light at the end of the tunnel”, away from the headlines we are still facing a further five years of austerity by stealth, including for: prisons, public health and homelessness services. We have demonstrated that the government has headroom to invest in services and spending to improve outcomes and reverse some of the damage: to not use this space would be highly irresponsible and would condemn the UK to a further five years of decline.”

Notes

The paper Austerity by stealth? The Chancellor’s options for the next Spending Review is available here.

NEF is grateful to the TUC for their support for this work. However all research has been conducted independently by NEF staff. The work and any views expressed are those of the authors’ alone.

The model used in this paper was built by NEF to look at UK departmental spending, consistent with UK Treasury accounting and OBR forecasting data. This paper is intended as the first in a series of reports to make use of this new analytical capability.

Our model adopts the OBR projection for total resource DEL, rolled forward for one additional year to 2023/​24 – the likely final year of a four year spending review – and revised upwards to reflect the profile of additional spending that has been announced for the NHS. To simulate individual department and sub-department budgets within DEL, we roll forward all current major ​‘protections’ from the current plans into the next spending review period, taking the latest government plans for 2019/​20 as our baseline. Devolved and non-protected budgets are then projected forward, also from respective 2019/​20 baselines, using an equation that allocates remaining funding within total DEL such that both the overall spending envelope isn’t breached but that the Barnet Formula is satisfied with respect to all relevant department budgets.

Cuts to non-protected, non-devolved departments have been estimated by assuming that the overall squeeze on spending estimated impacts smaller budgets in proportion to their size. Figures are presented in 2018/​19 prices, and rounded to the nearest £10m.

Figure

The government has room for further borrowing
Public sector net borrowing (OBR forecast and counterfactual) consistent with target for 2% GDP and cyclically adjusted current budget deficit (OBR forecast and counterfactual consistent with a balanced cyclically adjusted current budget) and estimates for implied spending room minus debt interest, £ billion, 2018/​19 prices, 2020/​21 to 2022/​23 

Source: NEF calculations based on Office for Budget Responsibility [OBR] (2018c). Public finances databank. http://​obr​.uk/​data/ and Office for Budget Responsibility [OBR] (2018d). Fiscal sustainability report – July 2018. http://​obr​.uk/​f​s​r​/​f​i​s​c​a​l​-​s​u​s​t​a​i​n​a​b​i​l​i​t​y​-​r​e​p​o​r​t​-​j​u​l​y​-​2018/ and
NB: NEF modelling has shown that both the maximum PSNB scenario and a balanced cyclically adjusted current budget deficit would be consistent with debt falling as a proportion of GDP in 2020/​21 and 2021/​22. In part, this is due to the repayment of loans under the Bank of England’s Term Funding Scheme, which would reduce net public debt on the Bank’s balance sheet. But there would be an increased chance that debt could rise marginally year-on-year thereafter. Debt interest estimated using OBR forecasts for gilt yields.