Ahead of the Budget on 15 March, there is some welcome good news
for the Chancellor. The UK can now expect a shorter, shallower
economic downturn than expected in the autumn, and borrowing this
year and next could come in around £30 billion lower than
previously forecast, owing largely to lower energy prices and
interest rates than previously expected, and
stronger-than-expected tax revenues.
Unfortunately, this improvement might not last. Savings on energy
support can only be temporary. The indications are that a
downgrade in the OBR’s medium-run growth forecast is possible,
which could easily offset much, if not all, of any enduring
fiscal improvements elsewhere (such as a reduction in
forecast debt interest spending, or an increase in the
‘tax-richness’ of growth). The Chancellor will doubtless also
need to find £6 billion a year to freeze fuel duties. In any
case, any improvement in borrowing since November will still
represent a deterioration on the forecast from a year ago.
Debt may well remain on course to fall very slightly by the end
of the forecast horizon, as the government’s new fiscal rules
stipulate. Or, forecast revisions could put debt on a slightly
rising path in five years’ time. This judgement is extremely
sensitive to the OBR’s assumptions about growth and inflation
five years hence. It would not be desirable for the government to
take immediate policy action in response to a minor forecast
change that puts it on track to miss the letter of its fiscal
rules – not least due to the uncertainty involved. Stepping back,
the case for permanent tax cuts or spending increases
that are not offset elsewhere is no stronger now than in the
autumn.
Unlocking public sector pay disputes will almost certainly
require extra funding from the Treasury: as it stands,
departments can ‘afford’ pay awards of at most 3.5% in 2023–24,
when both inflation and private sector awards are expected to run
considerably higher. Providing a CPI-matching 5.5% pay
award across the entire public sector in 2023–24 would add around
£5 billion to the pay bill, relative to the 3.5% or so
already apparently budgeted. That would more-or-less match
expected settlements in the private sector in the coming year,
but would mean locking in the real-terms pay cuts of 2022–23.
Going further and acting to undo that year’s reduction vis-à-vis
the private sector would cost a further £9 billion or so. And
even this would still leave public sector workers worse off (on
average) than in 2020–21.
The public finance outlook means that extra Treasury funding for
higher awards will likely mean higher taxes or spending squeezes
elsewhere. Consolidated pay awards would represent permanent
increases in spending – increases which could not be financed
from any short-term savings on the Energy Price Guarantee. The
Treasury’s £13–14 billion spending ‘Reserve’ could be the key to
resolving disputes in the near term, but this would not alter the
long-term calculation. One-off pay awards, or awards backdated to
the start of 2023, would pose fewer fiscal challenges but would
leave public sector staff permanently worse off.
This parliament has seen a decisive break with austerity: public
service spending is set to have grown by 2.8% a year between
2019–20 and 2024–25, well above the long-run average. The plans
for after 2025, pencilled in at the Autumn Statement, would see
funding grow by just 1% per year. Coming after the funding
increases of this parliament, that might look manageable.
However, given the inevitable demands from the NHS,
sticking to those plans would almost certainly mean cuts
to some other budgets. And while the ‘peace dividend’
from lower defence spending has historically allowed for greater
spending on the welfare state, we may now be facing a world where
the government feels the need to increase health and defence
budgets at the same time. That points to an enormously
difficult couple of years for other areas, such as local
government, prisons, further education and the courts – services
which faced deep cuts over the 2010s and which face deep-rooted
challenges of their own.
With poor economic growth and elevated debt interest
payments, even currently planned tax increases may not be
sufficient to meet the accumulated demands on public
spending.
Isabel Stockton, Senior Research Economist at IFS,
said:
‘It is difficult to see an end to public sector pay disputes and
industrial action that does not involve the Treasury providing
additional funding to departments. Short-term improvements in the
borrowing outlook could allow for one-off bonuses or backdated
pay awards for public sector workers. But it is far from clear
that these improvements will last and, if the Bank of England is
right, the UK’s medium-term growth outlook may have deteriorated.
Short-term savings cannot finance permanently higher spending –
which is what a higher consolidated pay rise for public sector
workers would entail. The Chancellor likely has less fiscal room
for manoeuvre than recent headlines might suggest.’
ENDS
Notes to Editor
The fiscal backdrop to Spring Budget 2023 is an IFS
briefing by Carl Emmerson, Isabel Stockton and Ben Zaranko
