The Chancellor has revealed a significant £35 billion in additional spending pressures for the fiscal year 2024-25, creating a challenging scenario for the upcoming Autumn Budget. This announcement highlights the pressing need to navigate financial constraints while aiming to stimulate growth and reduce debt, according to the Resolution Foundation.
These additional expenditures surpass the public spending plans laid out by the previous Chancellor in the March 2024 Budget. The most substantial costs include increased public-sector pay awards at £9.4 billion, higher expenses for processing asylum claims at £6.4 billion, and increased payments to rail operators amounting to £3 billion. Although the Treasury anticipates that not all of the projected £35 billion will be necessary, the figure vastly exceeds the £9 billion reserve allocated for unforeseen spending pressures.
Public sector pay increases
A significant portion of this financial burden stems from the Chancellor’s decision to follow the recommendations of public sector pay review bodies. Consequently, public sector workers will see an average pay rise of approximately 5.5% in 2024-25, equating to around £2,000 annually for the average worker. Despite this increase, public sector pay raises continue to lag behind the private sector, leaving public sector workers about £1,000 worse off compared to their private sector counterparts since Q4 2019.
To offset these additional costs, the government plans to implement several measures, including asking departments to make £3 billion in savings, commencing asylum removals, scrapping the previous administration’s social care reforms, and halting some transport investments. Additionally, stopping Winter Fuel Payments to pensioners not receiving means-tested Pension Credit is expected to save £1.4 billion this year.
The current assessment only addresses spending pressures for this year, yet many of these, such as the extra £9.4 billion for public sector pay, will persist throughout the Parliament. Consequently, even with the new cuts, the Chancellor faces a formidable task of reducing public sector debt. This may necessitate deeper cuts to unprotected departmental spending beyond the £18 billion already planned or could lead to additional tax hikes beyond the £23 billion a year announced by the previous government but not yet implemented.
Autumn budget challenges
The upcoming Autumn Budget poses further challenges, particularly if the Chancellor aims to maintain fiscal buffers amidst potential negative developments in growth or interest rates as forecasted by the Office for Budget Responsibility (OBR). A minor downward adjustment of 0.2 percentage points in trend productivity growth could create an additional £17 billion shortfall in public finances.
The Resolution Foundation stresses that in delivering the Autumn Budget, the government must prioritise its growth mission and focus on enhancing living standards. Recent announcements included cuts to transport investment and Winter Fuel Payments, which, if repeated, could hinder growth and harm living standards.
In a positive move, the Chancellor also introduced changes to the Budget process, granting the OBR new powers to announce when the government is at risk of breaching departmental spending limits. These powers, along with the requirement for three-year spending reviews every two years, are intended to eliminate the reliance on ‘fictional’ spending plans to meet fiscal targets.
James Smith, Research Director at the Resolution Foundation, commented on the situation, noting the substantial additional spending unveiled and its implications for the Autumn Budget. He also highlighted the context of existing cuts and the potential for further tax increases. “Any further reductions in public spending,” he added, “would come in the context of more than £18 billion of cuts to unprotected departments currently implied by public-finance forecasts; and any new tax rises would add to the £23 billion a year in tax increases announced, but not yet implemented, by the previous Government.” Smith also acknowledged the “good news” for public sector workers receiving above-inflation pay rises and the positive reforms for budget oversight.
This article is based on a press release from the Resolution Foundation.
