Sunak to set out post-COVID spending squeeze next month

By David Milliken and William Schomberg

LONDON (Reuters) - Finance minister Rishi Sunak will set out next month how he will squeeze spending across much of Britain's government after announcing hefty tax rises to fund health and social care on Tuesday.

Britain's budget deficit hit a peacetime high of 14% of gross domestic product in the year to March due to COVID-related spending, and since then Sunak has set out the biggest programme of tax rises since the 1970s to help narrow the gap.

On Oct. 27 he will deliver a half-yearly budget statement and a three-year spending plan, for which most ministries have been told to set out cost savings, the finance ministry said.

Prime Minister Boris Johnson announced a 12 billion-pound ($16.55 billion) annual tax increase on Tuesday, using long-standing difficulties in the funding of social care to justify tax rises which will largely be spent on health services.

The finance ministry said core day-to-day spending, adjusted for inflation, would rise by nearly 4% per year over the course of the current, five-year parliament, the largest real-terms increase in spending of any parliament since 2001.

Sunak has overseen a surge in public spending and temporary tax cuts over the past 18 months to protect Britain's economy from the impact of the coronavirus pandemic lockdowns.

Sunak said his Spending Review would keep the public finances on a sustainable path and did not envisage higher spending than announced so far.

BUDGET CUTS

Government departments will have to identify cuts of at least 5% from day-to-day budgets in order to free up funds for reinvestment in priority areas, the finance ministry said.

In March, Sunak announced big future rises in corporation tax and a freeze to income tax exemptions.

Taken with Tuesday's increases to national insurance, these amount to the biggest tax rises since at least the mid-1970s, according to the Resolution Foundation think tank.

"Boris Johnson has thrown low-tax conservatism out of the window, raising taxes on the working-age population to fund a big increase in NHS spending, and protect the assets of richer households from the costs of social care," Resolution Foundation think tank chief executive Torsten Bell said.

Johnson's plan includes a cap of 86,000 pounds for people paying towards the cost of their care.

The Institute for Fiscal Studies, another think tank, said the new public spending announcements would still leave overall public service spending 2-3 billion pounds lower each year than planned by the government before the pandemic.

"Given existing commitments on areas like schools, defence and overseas aid, other areas can expect their budgets to remain broadly flat over the next two years," IFS economist Ben Zaranko said.

"If substantial virus-related spending needs to be funded from within these totals – for instance to bail out rail operators – then some areas could even be facing cuts."

Sunak said extra spending might be required in exceptional circumstances given the uncertain outlook for the pandemic.

(Reporting by David Milliken and William Schomberg; Editing by Emelia Sithole-Matarise)