Rishi Sunak is poised to usher in cuts to public services of up to £17bn compared with the government’s pre-pandemic plans unless he takes action this summer to increase funding, a leading thinktank has warned.
The Institute for Fiscal Studies said the government was on track to spend between £14bn and £17bn less each year on a range of public services from April 2022 than had been earmarked prior to Covid-19.
As the chancellor prepares to allocate funding for government departments against a backdrop of rising Covid-19 infections, the leading tax and spending thinktank warned that there were growing demands on the public finances that needed to be tackled head on.
It comes after Sunak was forced to push back the formal launch of the Treasury’s spending review as part of the continuing fallout from his and the prime minister’s requirement to self-isolate.
The spending review process – which is used to set out budgets for Whitehall departments – had been due for an official launch by the chancellor this week before parliament breaks up for the summer recess on Thursday. However, sources said it was now delayed until later this year after MPs return to the Commons in September.
Treasury sources said preparatory work for the review had already begun and would continue over the summer.
In a report setting out the economic backdrop for the chancellor’s spending review, the IFS said Sunak was on course to be handed a £30bn windfall by the Office for Budget Responsibility (OBR) for the public finances this year amid a much faster recovery than first feared.
The Treasury watchdog had forecast a budget deficit – the shortfall between public spending and revenue – of £234bn this year. However, the IFS and economists from the US bank Citi said a shortfall closer to £203bn could be expected after the Covid vaccine paved the way for a rapid rebound in the economy this spring.
Despite this, the thinktank warned that the improvement was unlikely to persist, with Britain expected to incur lasting economic damage caused by the pandemic, rising debt interest costs and pressure to maintain higher levels of spending on key public services as the crisis continues.
Reflecting the longer-term damage, which will have an impact on the public purse, it said the UK economy was forecast to be 3% smaller by the middle of the decade than official pre-Covid estimates.
The IFS said that the chancellor therefore had little if any additional scope for increasing public spending if he was to maintain his medium-term target to balance day-to-day government spending with tax receipts, with a rule to only allow public borrowing to invest in long-term projects.
However, the thinktank warned that the government’s existing spending plans implied cuts to some unprotected government departments worth up to £17bn, and made no allowance for additional virus-related spending – which is set to be cut to zero after the end of the current financial year in March 2022, despite the ongoing crisis.
It comes after the OBR warned Sunak he would need to find an additional £10bn a year for the next three years to fund the cost of the government’s Covid response, including maintaining the NHS test-and-trace programme, providing vaccination boosters, and responding to the health impact of the pandemic.
Isabel Stockton, a research economist at IFS, said any higher spending to meet the demands and cost pressures from Covid, or to meet pre-existing spending demands such as for social care, could require spending cuts elsewhere, tax rises, or higher levels of borrowing.
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“Our forecasts suggest the chancellor has almost no additional wiggle room for permanent spending giveaways if he is to remain on course to deliver current budget balance. This suggests a very difficult spending review,” she said.
The Treasury said departmental budgets had not yet been confirmed for future years, adding: “It is therefore speculative to describe policy pressures at this stage.
“As we continue to recover from the pandemic, we remain committed to investing in our vital public services, and will continue to do so at the upcoming spending review.”
