Chancellor Rachel Reeves and Health Secretary Wes Streeting (Image: Getty)
The Chancellor is meeting her fiscal rules by a “gnat’s whisker” and a move in the wrong direction will “almost certainly” result in tax increases, one of Britain’s most respected economists has warned. Paul Johnson, director of the Institute for Fiscal Studies, cast doubt on whether Rachel Reeves’s cash injections into the NHS will allow the Government to fix the waiting lists crisis and fund its workforce plan.
He said: “Ms Reeves is now going to have all her fingers and all her toes crossed, hoping that the OBR will not be downgrading their forecasts in the autumn. With spending plans set, and ‘ironclad’ fiscal rules being met by gnat’s whisker, any move in the wrong direction will almost certainly spark more tax rises.”
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He shot down claims that economic forecasts and the nation’s finances have improved compared to the “genuinely difficult” situation a year ago. “Rather the reverse,” he said. Under Rachel Reeves’s plans, he said, “spending will be growing faster than the economy”. As a share of national income, spending by Government departments will jump from 18.6% in 2019-20 to 21.5% in 2028-29.
Mr Johnson described this as a “substantial increase in the size of the state”. Far from being a period of austerity, he described it as the “decade of a growing state”.
He warned that the 3% increase a year in NHS funding means this “left very little to share out among other departments”. Spending by the Department of Health and Social Care, he said, has rocketed from “around a quarter of day-to-day public service spending to a quite remarkable 40% per cent since the turn of the millennium”.
He added: “One has to question for how much longer this relentless increase can continue.”
Even so, despite the huge investment in health, Mr Johnson warned more cash may be needed to fund the NHS.
He said: “Growth of 3% a year is below the historic average. It may not even prove enough to fund the official workforce plan and it is at best marginal whether it will be enough to achieve the Government’s waiting list targets.”
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Mr Johnson also argues greater investment may be needed in defence.
He said: “Defence spending is rising to 2.5% of national income by 2027, but no increase thereafter. Given external demands and Government promises to get it to 3% of GDP at an unspecified date in the next parliament, there will be pressure to increase it further.
“And that’s before any increase in the NATO spending target to more like 3.5%, which this Government would presumably feel under some obligation to move towards.”
The economist also warned that the “schools' budget looks tight” when there is growing pressure to help children with special educational needs.
He said: “Outside of additional spending on free school meals it is essentially flat in real terms. Falling pupil numbers should give some room for manoeuvre and result in a modest real increase in per pupil funding, but absent some serious cost-saving reforms, ever-growing spending on special educational needs is likely to swallow much – or perhaps all – of that funding growth.”
He also cautioned there could be “trouble ahead” if trade unions are not satisfied with pay increases “broadly in line with inflation”.
There is the further risk the Government may have to respond to emergencies with little cash in its rainy-day fund.
Mr Johnson said: “The Treasury’s reserve has been pared right back and is lower than it has been in recent years, leaving little space to deal with unforeseen pressures.”
When it comes to capital spending, he said there are “hands down clear priorities” with “a 48% increase in the real terms defence capital budget and a cool 140% for energy and net zero”.
He said: “Transport does really quite poorly despite the slew of announcements – though that’s in part due to lower spending on the disaster that is HS2.”
Mr Johnson said childcare support has “turned out a lot more expensive than forecast”.
He said: “Spending plans for last year had already needed to be revised upwards by ￡500million, or more than a quarter,” adding: “It seems parents are even more keen on taking up free provision than expected – especially those with children under the age of two.
“Adding new legs to the welfare state is an expensive business.”
And he warned more council taxes are on the way. He said the spending review “assumes that council tax bills will rise by 5% a year”.
He said: “Indeed, if English councils do choose 5% increases – and most are likely to – bills look set to rise at their fastest rate over any parliament since 2001-05. That might not be so bad if it weren’t for the fact that those bills are based on property values in 1991, and that the system is regressive.
“Here’s another plea to reform council tax. If you are going to increase your reliance on it surely you are under even more of an obligation to reform it into something more rational.”
He sounded a sceptical note about the Chancellor’s determination to make efficiency savings, saying: “We can’t find any particular area of spending the government has decided it wants to withdraw from – other, perhaps, than overseas aid.”
Mr Johnson said “virtually every department is ripe for exactly the same cut in its administration budgets – 10% for all of them over the three years to 2028-29 and then another 5% in one year, 2029-30 – irrespective of how much they might have grown recently, and irrespective of planned spending increase”.
“That is not the result of a serious department-by-department analysis,” he warned, adding he hesitated to “accuse the Treasury of making up numbers, but…”
Mr Johnson expects the Government will change its spending plans, pointing out that day-to-day increases of just 1% are expected in 2027-28 and 2028-29.
He said: “If that last year’s spending plans aren’t topped up at some point I’ll be very surprised indeed.”
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Mr Johnson said he was “baffled” by the Chancellor’s speech on Wednesday, saying: “It did not appear to be a serious effort to provide any useful information to anybody.”
But he said she has had “some incredibly tough decisions to take and balancing acts to perform” and she has made a “perfectly reasonable set of prioritisations”.
The real test, he concluded, will be “how well the money is spent”.
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