Inflation could wipe out billions pledged for public services, experts warn
The Treasury is expected to increase spending by more than £8billion this year and more thereafter to offset the strain on public services caused by soaring inflation, experts have warned.
As utility budgets are set in cash terms – and therefore do not benefit from an automatic price increase, unlike tax revenues – the government’s spending plans are now “considerably less generous” than expected in the last fall, according to the Institute for Fiscal Studies. (IFS).
The think tank estimates that the average growth rate, in real terms, of the day-to-day funding of the civil service for the next three years has fallen from 3.3% under initial plans to 1.9% per year.
In other words, rising inflation should “wipe out” a significant chunk – more than 40% – of projected increases in real terms, he said.
To remedy this, the IFS estimates that the Treasury should increase its spending plans by more than £8bn this year, in 2022-23.
It is then expected to do the same by around £18billion in each of the next two years, 2023-24 and 2024-25 – and even that is ‘likely to be an understatement’ of what is needed , said the think tank.
The IFS warned that, without such action, estimates suggest the day-to-day defense budget would be more than 8% lower in 2024-25 than in 2021-22.
“The Ministry of Defense was already facing average reductions in real terms of 1.4% per year under initial plans; this can now increase to 2.8% per year,” he said.
The think tank noted that this would “strangely fit” with the positions of Conservative leadership candidates Rishi Sunak and Liz Truss on defense spending.
Mr Sunak sees NATO’s 2% GDP target as a “floor not a ceiling” and notes that it should reach 2.5% “over time”, but refuses to set “objectives arbitrary”.
Ms Truss, meanwhile, pledged to increase defense spending to 3% of GDP by 2030.
The IFS said estimates suggest spending on education and the Home Office would “barely increase” over the three-year review period under the current circumstances.
Geoff Barton, general secretary of the Association of School and College Leaders, said the analysis “shows very clearly the devastating impact of soaring inflation on education”.
If the government were to stick to existing spending limits despite inflation, departments would be forced to look to “efficiency savings” – something that “would pose acute challenges for public services, that is to say the least,” the IFS said.
Mr Barton added: “The reality in many schools, colleges and trusts is that they are facing massive increases in energy bills as well as rewards for teachers and support staff for whom there is no need. there is no additional government funding.
“It is very likely that this situation will lead to cuts in education provision and larger class sizes as schools and colleges try to find ways to balance their budgets.”
Donna Rowe-Merriman, business and community manager at union Unison, said public services and the people who run them need “a lot more money” in these “extraordinary days”.
Ben Zaranko, senior research economist at IFS, suggested that the two remaining candidates to be the next prime minister should outline their plans to combat the challenge.
“Higher inflation makes the government’s plans for civil service spending less generous than they originally were,” he said.
“Choosing not to compensate departments for unexpectedly high cost pressures would be a possible response to a cocktail of global economic shocks that would impoverish us as a nation, but would increase considerable pressures on public services as we approach the winter.
“We’ve heard a lot about the Conservative leadership hopefuls’ tax cut plans.
“Given the inflation-induced squeeze on departments, and given the clear signs of strain within the NHS in particular, it might make sense for Mr Sunak and Ms Truss to also outline their spending plans and vision public services and utilities.”
A Sunak campaign spokesman insisted the former chancellor had been ‘consistent and clear’ about the ‘pernicious’ threat of price hikes.
They accused Mrs. Truss of concocting tax cut plans that would “add fuel to the fire of inflation”.
The Treasury said the government was “taking significant steps to bring inflation under control”.
‘Plans announced at the 2021 spending review mean the department’s total spending is expected to reach £566bn in 2024-25, representing a cash increase of £150bn,’ a spokesperson said. .
“The government continues to focus on delivering our priorities efficiently and on budget, providing value for the taxpayer.
“The government is taking important steps to bring inflation under control through strong and independent monetary policy, responsible fiscal and spending decisions, and reforms to boost our productivity and growth.”