The Chancellor’s squeeze on public spending signals a long and deep period of austerity

The vaccine rollout and its effectiveness continue to exceed expectations. Polling shows this is reaping political rewards with a majority supporting the roadmap out of lockdown and the government holding a 7-point lead over Labour. In the Spring Budget the Chancellor sought to convert improvements in health into improvements in wealth and consolidate that political gain. 

Rishi Sunak designed his budget to protect businesses and families from the last blast of lockdown, accelerate recovery and reassure fiscal hawks that he does have a way back from ballooning deficits. The cost of supporting businesses, families and public services through the rescue phase of the pandemic is eyewatering; the equivalent of £12,400 per household according to the Resolution Foundation. That cost has led to a huge hole in the public finances and the Chancellor wants to cut the deficit quickly – from 16% of GDP this year to 2.8% in 5 years’ time. To cut the deficit Sunak announced a large increase in corporation tax, and a freeze on the allowances and thresholds for income tax, pension pots and inheritance duty.

The Budget measures will take tax as a share of GDP back to levels last seen in the late 1960s. But it’s not just tax that will be doing the heavy lifting of reducing the deficit; there’s a further squeeze on public spending. The planned cut to public spending will mean that in real terms per capita funding for the day-to-day running costs of public services will still be 6% below 2010 levels by the middle of this decade. This is a remarkably long and deep period of austerity. Alongside the proposed 1% pay rise for NHS staff in 2021/22, pegging earnings to inflation but with no increase in real wages, this paints a picture of things to come.

While the Chancellor is spending big on the rescue phase of COVID-19, the Budget was silent on how to recover health and social care after the pandemic. There was no hint of a plan to ‘build back better’ with more resilient public services or measures to tackle the deep inequalities in health which have been exposed and magnified by the pandemic. The further squeeze of public spending suggests that Treasury largess may be very short lived.

For the NHS it’s increasingly clear that COVID-19 costs won’t end as the lockdown lifts. Analysis by the Health Foundation has identified three main areas of cost that were not factored into the pre-COVID NHS long term plan settlement. First, there is the direct cost of managing the virus as it becomes endemic – running the test and trace system, a potential annual vaccine round and supporting those with long COVID. The second is the need for more capacity in the health system. If some social distancing and heightened infection control measures continue in hospitals, productivity will inevitably be hit and the NHS will need more staff, space and equipment to treat any given number of patients. The long term plan included stretching productivity targets for the NHS. COVID-19 calls into question the realism of those targets. Third, there is the backlog of patients waiting for non-COVID care and unmet need, particularly for mental health. The Health Foundation estimated that even with pretty optimistic assumptions about the path of the virus and the ability of the NHS to recover, the health system would need around £10 billion over and above the long term plan settlement in 2023/24, the last year of the government’s funding plan for the NHS.

More fundamentally, the pandemic has laid bare the fragility of the NHS to shocks. The folly of running our system permanently ‘hot’ with staffing, beds and equipment at the edge of capacity limits has been exposed. In the roadmap, the government commits to ‘building resilience for any future pandemics, both domestically and on the international stage’. In the NHS that almost certainly means more capacity. But resilience goes way beyond the NHS, it must also mean fixing the broken social care system, about which the Chancellor said nothing, and dealing with the underlying fundamental causes of ill health. Levels of disability and poor health for deprived and disadvantaged groups are high. Through COVID-19 this underlying vulnerability has been compounded by social conditions which allowed the virus to spread, with overcrowded housing, poverty and insecure work that have made it hard for people to self-isolate. Fixing these deep-seated inequalities will require funding and reform way beyond the NHS.

We don’t know what the government’s plans are for the post-pandemic NHS or wider public services. Another Budget and Spending Review are expected in the autumn when there may be greater clarity about both the virus and the economic recovery. But time isn’t on the government’s side – staff are exhausted, services over-stretched and patients are in need. Any delays to long-term investment in the workforce and capital infrastructure will further slow the NHS’s progress towards recovery. Snap polls suggest the Chancellor’s budget has gone down well but the big test is still to come.

This blog was originally published in HSJ on 5 March 2021.