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UK needs to allocate £44bn to protect public services from shocks

·Reporter
·3-min read
The IFS called on Tory leadership hopefuls Rishi Sunak and Liz Truss to set out their intentions for public services spending. Photo: PA
The IFS called on Tory leadership hopefuls Rishi Sunak and Liz Truss to set out their intentions for public services spending. Photo: PA

Britain needs to allocate more than £40bn ($48.5bn) in the coming years to protect public services from the global economic shocks facing the nation, a leading think tank has warned.

The Institute for Fiscal Studies (IFS) has estimated that the Treasury would need to top up spending plans by more than £8bn in the 2022−2023 fiscal year to make up for a drop in public spending.

Additionally, the Treasury would need to spend around £18bn in each of the next two years (2023−24 and 2024−25) as inflation is expected to wipe out over 40% of the planned real-terms increases.

Together that would equate to £44bn over the next three years.

According to IFS estimates, the average real-terms growth rate in day-to-day public service funding for the next three years fell from 3.3% under original plans to 1.9% per year.

Ordinarily, higher inflation boosts tax revenues as the incomes and spending on which taxes are levied grow more quickly, according to the IFS.

But the think tank argues that soaring prices also "squeeze" public services as budgets are set in cash terms and therefore do not "automatically increase in the face of higher-than-expected inflation".

"The government’s spending plans are now less generous than they were originally intended to be when set out last autumn, while public services – most notably the NHS – are under considerable, and visible, strain," it said.

Read more: Bank of England announces biggest interest rate hike in 27 years

Under the Bank of England’s latest forecasts, the UK economy is set to experience both a prolonged recession and an extended period of high inflation, which is expected to top 13% by October.

It comes ahead of GDP data due on Friday, with analysts at ING reaffirming Threadneedle Street's gloomy outlook that the country will experience a downturn this winter, forecasting a 1.1% contraction in June.

The IFS called on the Conservative leadership contenders Rishi Sunak and Liz Truss to set out their intentions for spending to revive public services.

"We’ve heard a great deal about the Conservative leadership candidates’ plans for tax cuts," Ben Zaranko, senior research economist and author of the briefing, said. "Given the inflation-induced squeeze on departments, and given the clear signs of strain within the NHS in particular, it might make sense for Sunak and Truss to also outline their plans and vision for public spending and public services."

Truss, the front-runner, has said she’d push through immediate tax cuts and call an emergency budget to help the economy. Sunak, the former chancellor of the exchequer, said those measures could stoke further inflation, take too long to implement and wouldn’t help the most needy.

Read more: UK energy bills forecast to top £4,200 by January

Zaranko added: "Higher inflation makes the government’s plans for public service spending less generous than they were originally intended to be.

"Fully compensating departments and returning to the real-terms growth path set out last autumn could require at least £8bn of additional spending this year, and an extra £18bn in each of the next two years.

"Choosing not to compensate departments for unexpectedly high cost pressures would be one possible response to a cocktail of global economic shocks that leave us poorer as a nation, but would heighten the considerable pressures on public services heading into the winter."

Watch: What is a recession and how do we spot one?