If the NHS is treated well, other services will feel the squeeze

As you will have noticed, Wednesday is spending review day. We will be bombarded with all sorts of claims and counter claims. Here’s a guide to what to look out for.

First, despite appearances and some of the speculation, this is emphatically not the moment at which we will learn anything about the overall level of spending the chancellor is planning. That has already been announced. Wednesday will be all about how that spending is to be allocated between different public services. So we will learn something about the government’s priorities.

Second, this should not be about decisions on pensions and welfare — they sit outside of the spending review process. If we do get an announcement on the winter fuel payment that will contravene the prime minister’s assertion that a decision will be announced at the next fiscal event — that is the autumn budget. This is not supposed to be a fiscal event. It will not be accompanied by an Office for Budget Responsibility forecast. It is not supposed to change total spending plans.

Third, to interpret what Rachel Reeves does say it will be important to bear in mind two things. One is that she has two separate budgets, one for capital spending — buildings, tanks, roads, that sort of thing — and one for day-to-day spending, of which pay for teachers, nurses, soldiers and so on is the most important component. Changes to these budgets will, or at least should be, described separately.

The spending review will be allocating funding for the fiscal years 2026-27, 2027-28 and 2028-29 (plus, in the case of capital spending, 2029-30). The big increases in spending announced last year are baked into the starting baseline. There are all sorts of ways of obfuscating all this.

You may already have seen reports of Treasury briefing about an additional £300 billion of spending over the parliament. Now, £300 billion is a very big number indeed. It is about half of total annual departmental spending. But what the Treasury does not mean is that annual spending will be 50 per cent, or £300 billion, higher by the end of the parliament than it was at the beginning.

Rather, what they are doing is taking total spending in each year under current plans, comparing that with — essentially fictitious — spending plans set out by the last government, and cumulating the difference over a five-year period. That makes for a very impressive sounding number and I expect we will hear such numbers bandied around extensively by the government side. Whether these numbers are even slightly meaningful I will leave you to judge.

The reality is that spending is set to increase only very modestly in real terms over the coming period. Day-to-day spending is due to rise by about 1.2 per cent a year on average, and capital spending by 1.3 per cent a year. That’s why, in terms of planned spending growth, this will be one of the tightest spending reviews in modern times, outside of the austerity period of the early 2010s.

That’s not the whole story though. Especially on the capital side this comes off the back of some genuinely big increases. The last government increased investment spending quite significantly, and this one has boosted it again to its highest sustained level in decades. So when it comes to capital spending there will be plenty of cash to go around, and the government will be absolutely right to point to that fact. That said, literally all of the modest increase in such spending planned over the next four years will go on defence — on kit for the army, navy and air force.

Things look much tougher when it comes to the other set of decisions on day-to-day spending. That has increased by about two and a half per cent in real terms in each of last year and this. It is due to increase by an average of just 1.2 per cent a year over the next three years. That may not sound too bad — an increase is an increase. But the reality is that if overall spending increases at this rate, then a whole slew of government departments will have to manage with cuts or, at best, no increase.

The reason for that is our NHS. It is huge. It accounts for almost four pounds in every ten of the day-to-day public services budget. And it is voracious. You can be absolutely sure that it will get more than 1.2 per cent a year. A lot more. On average, over the last 25 years or so, it has got two percentage points more growth per year than other departments.

One number to look out for is 2.5 per cent. If the department for health and social care gets an annual increase of that amount, then after accounting for the extra cash promised to defence, there will be nothing left to increase the budgets of other departments. 2.5 for health means zero, on average, for everything else. It will probably get more than that. There is speculation that it will get an increase 2.8 per cent, or perhaps 3 per cent a year. 

That will mean cuts to be shared out elsewhere.

Cuts to public service budgets would not be impossible. They would come after rapid increases in spending on most services in recent years. But they would not be easy, and would require ruthless prioritisation. Even if we get much needed improvements in public sector productivity a combination of reductions in public sector employment, public sector pay and the range of public services the government provides would likely be required.

So, one last thing to look out for: if the government is promising cuts, do those cuts come with realistic plans for how to achieve them? If not then we are likely to be in for a rocky ride.

This article was first published in The Times, and is reproduced with kind permission.