New analysis shows £22bn in hidden cuts to public services in today’s budget

New analysis of today’s Spring 2023 budget shows a further £21.6bn (2022/​23 prices) in unannounced cuts to public services by 2027/​28, compared to the level of real-terms spending announced by the Chancellor today, according to the New Economics Foundation (NEF). The hidden cut is a result of the Office for Budget Responsibility (OBR ) assuming inflation will fall well below the Bank of England’s target of 2% from 2024/​25 – including assuming zero inflation in 2025/​26. But if inflation were to fall that low the Bank of England would be expected to step in to maintain inflation at or above the target of 2%. The NEF analysis looks at what would happen if inflation does not fall below the 2% target.

In separate analysis today, NEF also estimated the hit to local economies as a result of below- inflation pay settlements for public sector workers across the country. The research showed the implied offer of 8.7% on average for public sector workers over two years between 2022 and 2024 amounts to a real- terms pay cut of 8%. After adjusting this real- terms wage cut for public sector employment levels and pay across local economies, NEF analysis showed that failing to protect public sector pay in line with inflation would hit Wales, Scotland and the North East by twice as much as London. All other English regions and Northern Ireland were also hit worse than the capital.

NEF analysis also broke down the £21.6bn cut to public services by department:

• The Department for Health and Social Care would see its budget fall by £8.8bn (2022/​23 prices), reducing funds for nurses, doctors and other hospital staff.

• The Department for Education would see its real spending power fall by £3.8bn, reducing funds for courses, teachers and staffing schools.

• The Home Office would see budgets fall by £700m, reducing funds for policing and crime prevention services.

• The Ministry of Justice would see budgets fall by £400m, reducing spending on staffing prisons, courts and delivering legal aid.

After adjusting for population growth and a more realistic inflation forecast, the NEF analysis shows that total spending on services in 2027/​28 would be 12% lower compared with 2009/​10 in real terms. Even departments that saw some level of protection during the austerity years would be only 3% higher in 2027/​28 than they were in 2009/​10, and departments that saw no protections would have just over two thirds of the funding they had in 2009/​10.

The £21.6 billion cut would come in addition to not only the further discretionary cuts announced at the Autumn Statement, but also the failure to protect budgets against the effects of rising inflation during the present spending review period. The combined impact of all these factors would leave the level of spending on public services in 2027/​28 a total of £67.6 billion lower than implied by the original 2021 spending review plans.

Alfie Stirling, Chief Economist and Director of Research at NEF, said:

“The government is exploiting a curious feature of the OBR’s forecast model, which can see projected inflation fall well below the level that policymakers at the Bank of England are ever likely to allow in practice. It allowed the chancellor to play smoke and mirrors with the future of public services, claiming that budgets would continue to rise in real terms over the next five years, when actually they are likely to flat line – suppressing local economies along the way.

“There is no serious or credible justification for the government’s current plans. Consecutive UK chancellors have already put the country through a decade of austerity, which means we know exactly how it ends: near stagnant earnings growth, threadbare public safety nets and the first stall in life expectancy on modern record.”

Contact

Sofie Jenkinson, sofie.jenkinson@neweconomics.org, 07981023031

Notes to editors

The analysis is of HMT Public Expenditure Statistical Analyses 2013 – 2022, Spending Review 2021, Autumn Statement 2022, Office for Budget Responsibility and Office for National Statistics data. Our inflation scenario differs from the OBR’s that was used by the Treasury by assuming 2% inflation from 2024 – 25. As departmental RDEL is not provided after 2024 – 25 this has been calculated per department as a fixed share of total ​‘unprotected’ RDEL based on 2024 – 25 figures. This is after protecting a 3.1% real-terms increase in health and social care spending per year, a constant spend per pupil in real terms and a fixed defence and foreign, commonwealth and development spend as % GDP. For our comparison to the original 2021 spending review plans, we create a counterfactual path for public spending where government first protects budgets for inflation during the present spending review period and then from 2025 – 26 onwards nominal RDEL grows in line with nominal GDP in line with the OBR’s baseline assumption. The headline figure of £28bn in cuts to annual departmental budgets by 2027/​28 is in today’s prices, based on the CPI measure of inflation.

Analysis of public sector pay took the difference between CPI inflation (using the Office for Budget Responsibility’s latest Economic and Fiscal Outlook data) and actual public pay increases. This real pay reduction was applied for the two-year period from April 2022 to March 2024 with compounding. We applied an actual public pay increase of 5.0% for the year beginning in April 2022 in line with the average of pay deals agreed in summer 2022. For the year beginning April 2023 we assume an actual public pay increase of 3.5% on average in line with the recommendations of government departments as of February 2023.