Just when you thought it was safe

By Jonathan Werran | 01 September 2021
  • Jonathan Werran

As the old joke from the Catskill Mountains resorts went, two old ladies kvetch and complain about the dire quality of the catering. ‘Such atrocious food!’ laments the first. ‘Such small portions,’ chimes the second. The same has been levelled in recent years about the quality of public services and administration thereof.

As a nation that is said to want Scandinavian-style welfare at US tax levels, the mismatch between demand on public services and state functions, and the ability to fund the whole shooting match, only widens.

One effect of the COVID-19 experience has been for the Government, led by a self-confessed ‘Brexity Hezza’, to intervene to a degree hitherto thought unthinkable by a modern Conservative Government. From the billions in furlough payments that went to supporting employment during lockdown, track and trace to PPE and vaccine procurement, from pledges on net-zero to infrastructure associated with levelling up, the role and powers of the British state have been engorged and enlarged by dire necessity to an almost wartime footing.

When George Osborne was chancellor for the duration of the Coalition years through to the short stint of David Cameron’s Conservative majority Government, he advocated for the 35% state in terms of national income raised from taxes. To some contemporary critics, including those within the Coalition tent, such as business secretary Dr Vince Cable, this was wholly unrealistic. Looking at the Office for Budget Responsibility’s forecasts for 2021-22, this seems another battle he won – with tax take at 36.2% of GDP.

On the debit side, Government spending breaches the trillion mark at £1,053bn – equivalent to 46.5% of national income. This leaves the annual deficit at an otherwise, in normal times, astonishing predicted level of £234bn. A lurch towards a more 40% state seems ineluctable.

We have good advance notice of the improved settlements to defence, education and health service budgets. Which, in short, means that likely data points for the October Spending Review and the impact on revenue or day-to-day services for unprotected departments – which include local government – can be inputted by judicious armchair chancellors now. And, depending on the view, plotted into PowerPoint graphs of either doom or quiet hope.

So in this context the 2021 Spending Review will draw a fiscal line in the sand. Remember, this will be the first genuine multi-year public finance settlement for a while – we have got by on stop-gap single year spending rounds owing to Brexit and COVID contingencies in the last two years. It will set out in thick marker lines the true extent and borders of state intervention in what is expected to be a short year or two at most before the next General Election.

Expect to see central Government be seen to lead by example by culling some, if not all, of the workforce increases occasioned by Brexit and COVID and making hairshirt cuts to departmental budgets.

As with recent spending rounds, the departmental expenditure limits (DEL) will set a trajectory of modest real terms increases with expectations around council tax yields and business rates revenues to hold the line.

The old Treasury joke about welfare and miscellaneous spend, labelled (AME) standing for Annually (Un)managed Expenditure isn’t really that funny anymore. It is too close to home, too near the bone after the billions splurged on furlough support for the employed, self-employed and business loans.

The tramlines for capital expenditure and support for housing growth should be well enough laid down for us to understand the parameters – although the unknown is what the levelling up White Paper, to be published alongside the Spending Review, might mean in regional allocations to rebalance the national economy and reduce inequalities and the productivity gap.

A consequent squeeze on revenue expenditure might, however, stymie any arguments for investment in preventative upstream services, let alone a dramatic reconfiguring of wider public service delivery.

With Boris Johnson on occasion proudly flaunting his full title as first lord of the Treasury, chancellor Rishi Sunak does not have the latitude, as George Osborne did from his firm working partnership with David Cameron, to swing an axe of front-loaded cuts to local government in the manner of the epochal 2010 Spending Review.

A better parallel would be the, to all intents and purposes, fair COVID-related supplementary spending. It won’t be great but it will be just enough.

The political aim of the Spending Review is to strip the barnacles off the boat and dye the clear blue water for a General Election battle most likely to be fought in 2023.

Mind you, the seas might become even choppier then. As a Jaws-quoting Prime Minister might remark from the movie’s tagline: ‘Just when you thought it was safe to go back into the water’.

Jonathan Werran is chief executive of Localis

@Localis

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Whitehall Finance Policy Spending Review Austerity Treasury Boris Johnson
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