Fiscal events in the UK are often a feat of numeric acrobatics – blink and you might miss the trick. As ringmaster, Jeremy Hunt in his first Autumn Statement has kept the attention up close on near-term improvements to the economy. Voila, an additional £27 bn to fund 110 growth boosting measures! Following the lead that fiscal discipline has returned, one might just believe that his two giveaways signal good times ahead.
Shift your gaze further afield and all is not what it seems. After more than a decade of austerity, public services are in a dire state of disrepair. Prolonged underinvestment in capital spending has had a serious impact on the performance in most services. According to CIPFA’s latest Performance Tracker, maintenance backlogs across the criminal justice system, schools, hospitals and roads amounted to a staggering £37bn. The Chancellor’s £9bn giveaway in business investment tax relief could have helped fill that hole.
Put simply, the Government’s spending plans are unsustainable. Much higher-than-expected inflation has eroded the real-terms value of the current spending review to the tune of £19bn. Worse still, according to the Office of Budget Responsibility (OBR) government commitments to boost spending on defence and overseas aid mean that unprotected departments may see their resource spending cut by anywhere from 2.3% to 4.1%. With the backlog in crown courts at a record high and the prison population up 13% over three years ago, there is little remaining capacity to flex. These services are already in crisis mode.
Without more generous funding settlements, most public services will be performing worse in 2027/28 than pre-pandemic. Higher demand, increased costs and less funding has meant the closure or restructuring of libraries, bus networks and road maintenance. Real spending on neighbourhood services in the decade since 2009/10, excluding children’s services and adult social care, has been down by nearly 40%. Pressure for local authorities to bridge the gap through more innovative financing strategies has contributed to more bankruptcies – or section 114 notices – being announced over the past three years.
In the Autumn Statement, local devolution through the expansion of single settlements was a positive step change. A highly fragmented landscape of small short-term competed funding pots has discouraged councils from efficient or effective public spending. While more should be done on fiscal decentralisation, these multi-year settlements will at least provide further autonomy in decision making to metro mayors. Rather than simply extend this devolution framework, the government should prioritise learning what works by completing the existing deals with Manchester and the West Midlands.
Despite the chancellor’s cuts to national insurance contributions saving workers £10bn each year, the net effect from prior tax changes since 2021 has been negative. Inflation has translated to higher nominal pay awards, but Hunt’s previous decision to freeze personal income thresholds has in fact raised more than four times that amount in revenue. By 2028/29, nearly four million additional people will have been drawn into paying tax. This regressive system disproportionately affects those on lower incomes and did not help to resolve strike action affecting workers such as nurses, teachers and ambulance drivers.
Taken together, the tax cuts announced in the Autumn Statement will still see the tax burden increase to a postwar record high of 38% as a share of GDP. Compared to just prior to the pandemic, the OBR expects living standards next year to fall by 3.5% making many people feel poorer. For a government seemingly obsessed with growing the economy through gains in productivity, Jeremy Hunt has instead traded up investing in public services for quick wins that continue to undermine whole system resilience. If a zero-sum game is to be avoided, temporary reliefs to business rates will eventually need to give way to more lasting structural reforms.
Leaving these decisions until after the General Election will only delay the day of reckoning. Inflation remains more than double the Bank of England’s target and is expected to stay higher for longer. There is not much fiscal headroom for this chancellor (or the next) to respond to downside surprises, let alone a new shock. Although there will be a temptation for further giveaways to woo voters, a large fiscal consolidation is set to hit the economy next year.
Jeff Matsu is chief economist at CIPFA
