A healthy State?

For a Government elected to deliver change, particularly for our crumbling public services, the Spending Review was a defining moment – allocating departmental budgets (about half of all public spending) right through to the next election.

First and foremost, the decisions in this Spending Review were about allocating spending for the next few years: three years for day-to-day resourcing, four for capital investment plans. The big picture is dominated by day-to-day spending, which constitutes around four-fifths of the total, but the pattern and implications are very different, so it makes sense to consider them separately.

The big winner – both overall and in terms of day-to-day spending – was health, which by the last year of this Parliament sees its annual day-to-day budget being boosted by £17.2 billion. This is disproportionate, even allowing for its giant share of the total public service budget, and leaves health and care sweeping up a remarkable 90 per cent of all the planned increases in day-to-day departmental budgets through the three years of this Spending Review. While rapid by today’s standards, this growth looks modest through an historical lens: annualised growth will be 2.8 per cent against 3.6 per cent since the inception of the NHS. Whether – or not – that is sufficient for the Government to deliver on its mission to slash waiting lists and build a society “where everyone lives well for longer” will depend a great deal on whether the Government can turn around the post-pandemic collapse in NHS productivity. A flat real capital settlement for health over the next three years will not make that easy.

Most other services will nonetheless look on at the new health settlement with envy. Education is also up (by 1.3 per cent annually per pupil) but the effects in classrooms and colleges will be muted by the need to cover the Government’s welcome extension of free school meals and rising pressures relating to Special Educational Needs. Elsewhere, there are losers. On average, spending on everything apart from health, defence, education, and overseas aid falls slightly in real per person terms between 2025-26 and 2028-29 (by 1.3 per cent on average, or £2.4 billion). The departments with the biggest cuts include foreign aid (as we knew), and transport (which sees real-terms day-to-day per person cuts of 5.4 per cent a year as post-Covid rail subsidies are reduced).

All this means that, in very many areas, hopes for improvement now rely on making existing resources stretch further. One potentially troubling case in point is the Department for Work and Pensions, where the revolution in employment support that was recently promised to sweeten sharp disability benefit cuts will now have to be funded out of essentially frozen day-to-day per person budgets over the next three years.

But the difficulties represented by cut or frozen budgets over the next three years depends crucially on the starting point. Last autumn, the Chancellor funded sizeable increases in public spending both last year and this year. Initially she was at pains to stress she was filling inherited black holes. But now she has been through every line of public spending and thrashed out new plans for the rest of the Parliament – plans that all build on the expenditure baseline she had already increased.

When we consider this Parliament as a whole, health and care continues to rank as the big winner, taking up the lion’s share of the total boost in annual budgets across departments on a 2023-24 baseline. But after allowing for the increases that were already secured for other departments, some – such as DWP and Justice – do look to be faring relatively better than they do when the new Spending Review is considered in isolation.

Stepping back, the real level of day-to-day (i.e. non-investment) departmental spending per person is returning to roughly where it was in 2009-10. After the roller-coaster of austerity, the brief burst of Boris Johnson boosterism, and then the vast bills of the pandemic, real day-to-day resources per person have ended up back where they started. But the shape of the state has changed significantly. Over the near-two-decades between 2009-10 and 2028-29, health and care looms ever larger, rising from 34 per cent of day-to-day departmental spending directly controlled by Westminster to 49 per cent. By contrast, education has stagnated: starting at 21 per cent of day-to-day spend, and set to end up at 21 per cent too. On this longer view, many other services have faced – and continue to face – a serious squeeze. Day-to-day per person resources will, for example, have fallen by 16 per cent for Justice, by 31 per cent for Work and Pensions, and by 50 per cent for Housing, Communities and Local Government over the same period.

The Government is especially keen to trumpet its long-term capital spending plans, which were unlocked by last year’s rewriting of the fiscal rules. These plans boost capital spending in 2029-30 by £33 billion above what the previous Government had planned, maintaining investment at its highest sustained rate since the 1980s. Plans don’t always come off – Johnson had similar ambitions which didn’t survive context with the pandemic – but the hope is that this is a serious break with the productivity-sapping British tradition of volatile and excessively low public investment.

Just as with day-to-day resourcing, though, it is important to keep an eye on the evolving balance of investment. The biggest investment winner in this Spending Review was Defence. Indeed, once increases in financial transactions are stripped out, the £7.3 billion a year real-terms increase in defence contrasts sharply with the £3.6 billion cut to real investment across all other departments. As it allocates such a big chunk of the increased capital spending plans to defence, in the light of a world that has changed since those totals were set last autumn, the Government will need to hope that more military equipment can contribute to its growth ambitions as well as its defence ones.

Over the Parliament, the big picture is of a roughly stable non-defence investment budget as a share of the economy. This allows previous increases in, for example, energy investment to be maintained. Relative to the previous Government’s planned cuts, this extra investment should result in a much-needed boost to growth. And a welcome increase in funding for affordable housing means annual budgets will be higher than since 2010 but lower than at the end of the last Labour government.

After the passing political drama of a Spending Review at Westminster, what really matters to us all – and particularly the less well-off – is the delivery of public services. Compared to plans of the previous Government, this Spending Review delivers a boost to benefit in-kind income for households of £1,400 for a typical family in 2028-29. That gain is bigger still – at an average of £1,700 – for the poorest households. Some specific decisions this week – notably the expansion of free-school meals to many more low-paid working families, and the renewal of the Household Support Fund – contribute to this progressive slant.

So what have we learnt today about the Government’s priorities? With health and defence the relative winners, we can deduce that shorter hospital waits and national security are top of the political wish-list. That leaves significant ambitions elsewhere to be delivered without significant extra resources. Looking ahead, a bright summer of spending is likely to become a darkening autumn of fiscal reality. The combination of higher gilt yields (up around 0.2 percentage points since March), a weakening in most forecasts for economic growth and other pressures – including the unfunded £1.25 billion ‘U-turn’ on Winter Fuel Payments and any funds needed to support the Child Poverty Strategy – could well require the Chancellor to raise taxes further meet her fiscal rules in her next Budget towards the end of the year.

Overall, this Spending Review was about the Government pinning its colours to the mast on its top priorities. But it was also symptomatic of the deep dilemmas at the heart of the UK’s public finances. The state is forecast to grow roughly in line with the economy (and thus, quite slowly). Absent further tax rises, any fiscally responsible government will struggle to do much better than that. With demand and prices for healthcare rising much faster than the economy, how are we going to pay for it? Either everyone else will be squeezed without end, or the tax side of the equation will have to change.