Britain 'heading for new era of austerity', thinktank warns

Britain could be headed for a new era of austerity, the leading tax and spending thinktank has warned, after analysis of Rishi Sunak’s budget revealed deep cuts in spending plans for Whitehall departments and local government.

The Institute for Fiscal Studies (IFS) said, despite the added pressures caused by Covid-19, areas of spending not singled out for special treatment by the Treasury were facing an 8% reduction in their budgets compared with pre-pandemic plans. Some of the departments now being lined up for fresh spending curbs – such as the Home Office and HMRC – had additional responsibilities as a result of Brexit, the IFS said.

Ben Zaranko, research economist at the Institute, said: “Plans can change but, as things stand, for many public services, the first half of the 2020s could feel like the austerity of the 2010s.”

The Treasury said: “This is categorically not a return to austerity. We are significantly increasing public spending with a £72bn rise over this year and next – and forecasted rises in spending over the rest of this parliament. We have not set departmental budgets for 2022 onwards, but remain committed to investing in our vital public services. Anything that suggests this government is returning to austerity is misleading.”

At the time of the budget earlier this month, the independent Office for Budget Responsibility – the body that forecasts the economy and the public finances – said Sunak had shaved £4bn from public service spending from 2022-23, an inflation-adjusted cut of 1%.

The IFS said the cut was actually 3% once allowance was made for the Barnett formula – which meant extra spending on schools in England had to be matched by top-ups to education budgets for Scotland, Wales and Northern Ireland. This came on top of the £10bn cut to spending plans announced by the chancellor last November.

The Treasury has said the cuts are the result of a “mechanical” change resulting from the fact that inflation will be lower than previously expected in 2022-23 and that Sunak will still be able to deliver a real increase in spending of 2.1% between 2021-22 and 2022-3.

The IFS said Sunak was not taking account of the fact that inflation was projected to be higher than forecast in 2021-22. “They have, in effect, acted on one and ignored the other, and saved £4bn per year in the process.”

Overall, the IFS said, public service spending was now set to be roughly £14bn lower than planned pre-Covid. Of that, about £5bn came from lower spending on overseas aid.

Some areas of spending – such as the NHS and schools – are ringfenced from cuts, but cash spending for unprotected departments would be £9bn lower than under pre-pandemic plans. After taking inflation into account, this would mean a real cut of 7.5% in 2022-23.

Zaranko said: “For departments not fortunate enough to be protected by a pre-existing agreement with the Treasury, the chancellor’s spending plans are even tighter than they first appeared. This poses clear and obvious challenges, not least because of the new pressures created by the pandemic.”

The IFS said Sunak’s plans implied cuts for “perennially squeezed” areas such as the Crown Prosecution Service and the courts system. “It would also mean further cuts for local government – something that would be difficult to reconcile with a coherent ‘levelling-up’ agenda.”

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