Find below our further commentary on: public sector pay, public spending, reforms to the spending framework, the social care cap and the Advanced British Standard.
Public sector pay
Bee Boileau, Research Economist at the IFS, said:
“The single largest pressure on day-to-day public spending identified today by Rachel Reeves is higher-than-expected public sector pay awards for 2024–25, resulting in an additional cost of £9.4bn. Reeves announced that pay awards would be in the region of 5–6%, in line with this year’s recommendations from the Pay Review Bodies.
These pay awards are certainly higher than what departments were budgeting for, with spending plans based on an assumption that pay awards would be around 2% this year. But pay awards in this range should not have been a complete surprise. The Bank of England has published multiple forecasts for private sector pay settlements in the region of 5.5%. It was far from certain that recommendations would come in this high. But they were always likely to exceed the 2% rate of inflation, given ongoing concerns around recruitment and retention.
The government is asking departments to absorb a third of the additional costs from the higher pay award this year. This is not a new phenomenon: the government estimates departments have managed to absorb most of the £11-12 billion costs from higher-than-expected pay settlements in 2022–23 and 2023–24 (when pay awards came in around 2 and 4 percentage points higher than planned, respectively). But each time departments are asked to do this, it gets harder. This policy has limits. And there is always a risk that departments meet pay pressures by raiding capital budgets, undermining much-needed efforts to boost public sector productivity.
Crucially, public sector pay rises are a permanent change in spending. We can expect these to pass through into future years, and add to the challenge at the Spending Review.”
Public spending
Max Warner, Research Economist at the IFS, said:
“Rachel Reeves set out £35 billion of in-year pressures on day-to-day public service spending. As well as public sector pay (£9.4 billion for awards this year, plus a £2.2 billion overhang from awards last year), this included £6.4 billion for asylum and illegal migration, and £2.9 billion for rail services. £13 billion of the total pressures identified can be covered by reserve funding and underspends elsewhere, leaving £22 billion in remaining funding pressures.
The government has been careful not to commit to providing funding to meet all of these pressures. We’ll have to wait for the October Budget and Spending Review for the final details. But even if the proposed £5.5 billion of in-year savings can be successfully found, and even if the government can identify some further in-year savings by the time of the Budget, it seems likely there will still need to be substantial top-ups to budgets this year.
Rachel Reeves’ statement focused on 2024-25, the financial year in progress. These spending pressures are separate from the implied cuts to unprotected public services in future years, which have received considerably more attention.
On the future of public service spending, and what lies in store for unprotected departments, today’s statement essentially leaves us none the wiser. We don’t know the extent to which the spending pressures set out today will prove to be permanent. And we don’t know the extent to which top-ups to budgets for 2024-25 will feed through to future years. In some cases, such as public sector pay, we should clearly expect these increases to be permanent. For a Chancellor with a debt target and a promise not to raise taxes on working people, this could spell fiscal trouble.”
Reforms to the spending framework
Ben Zaranko, Senior Research Economist at the IFS, said:
“The decision to carry out a one-year spending review this autumn, followed by a more comprehensive multi-year spending review next spring, strikes a sensible balance. It is also welcome that, going forward, the Treasury have committed to hold a multi-year spending review every two years. Regular reviews should prevent public service budgets and the demands on those budgets from getting so out of whack - the root cause of many of the in-year overspends revealed today. It will also make it harder for governments to game the fiscal rules by pencilling in future spending cuts they have no intention of delivering.
The requirement for the Treasury to share more details of the pressures on departmental budgets with the OBR is eminently sensible, as is the commitment to hold only one major fiscal event a year. The proof will be in the pudding, but these changes should lead to better and more transparent fiscal policy making.”
Social care cap
David Sturrock, Senior Research Economist at the IFS, said:
"The Chancellor has announced she is scrapping reforms to adult social care in England that were due to come into effect in October 2025, but for which funding had yet to be allocated. These reforms would have capped the costs people have to pay towards their care over their lifetime, and increased the generosity of means-tests that determine who qualifies for support with care costs from local councils (for those yet to reach the cap). The decision not to go ahead with this expansion of the welfare state will save £1 billion next financial year, and around £4 - 5 billion a year by the end of the parliament.
However, scrapping these reforms means the risk of extremely high social care costs (that in some cases can total hundreds of thousands of pounds) will remain with individuals, other than for those with low income and assets. Those who end up with the highest care needs – such as those who need dementia care for a number of years – will continue to pay the most. This is in contrast to other areas of life where insurance (such as life or house insurance) or state provision (such as the NHS) allows major risks to be shared to a greater degree. And with both services under pressure and unhappiness about the current model of funding, the government may still see itself having to find substantial funds for social care services further down the line. Indeed without reform it is difficult to discern what Labour’s proposed ‘National Care Service’ will entail beyond an aim for better terms and conditions for staff.”
Advanced British Standard
Imran Tahir, Research Economist at the IFS, said:
“Less than a year after it was announced, one of the biggest shake-ups in England’s qualifications system has been cancelled. The Advanced British Standard was supposed to replace both A levels and T levels, bringing in a harmonised and broader curriculum with a 15% increase in teaching hours. While this is a choice to row back on planned future reforms (rather than a new change in itself), it still contributes to the almost permanent revolution that vocational education has found itself in for the last 30 years. That policy churn has its own costs.
But in fiscal terms, the bigger costs were still well ahead in the future: the Advanced British Standard was not set to be rolled out until the mid-2030s. For this year and next, the previous government had promised around £100 million a year for teacher recruitment and retention and £150 million a year to support students re-sitting maths and English GCSEs - both of which the current government says it will continue. That means that it is less clear where the planned £185 million of savings next year will come from. But the serious longer-term savings will come from a genuine scaling back of ambitions to increase teaching time closer to the norm in many other high-income countries.”
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