Is the UK really facing more public sector austerity because of the pandemic?

At a speech in Dudley back in June, Boris Johnson declared his government would not deal with the fallout from the coronavirus pandemic in the same way that George Osborne and David Cameron had reacted to the aftermath of the global financial crisis a decade ago.

“We will not be responding to this crisis with what people called austerity,” the prime minister said.  

“We are not going to try to cheese-pare our way out of trouble because the world has moved on since 2008”.

Yet the Institute for Fiscal Studies think tank warned this week that some areas of government are facing “another bout of austerity” under the spending plans pencilled in by this government.

So how can this be? Was the prime minister lying three months ago? Or has policy changed since then?

To understand what’s going on it’s worth going back to the 11 March budget.

In the first fiscal event since the 2019 election, the new chancellor, Rishi Sunak, announced that total spending on public services would rise by around 11 per cent after adjusting for inflation, between 2019–20 and 2023–24.

There are many definitions of austerity, but if one measures defines it as a decline in the level of public services spending this would have reversed a fair proportion of the austerity of the past decade.

This implied per-person public service spending recovering around two thirds of what was lost since 2010.

But the March Budget took place before the lockdown, which shut down large swathes of the UK economy.

In the subsequent months the government has also authorised vast new public spending commitments to enable the country to deal with the pandemic.

These include such as £15bn for purchasing personal protective equipment (PPE) for health workers and £12bn for setting up a new test and trace infrastructure.

The IFS estimates that the health budget alone has been increased by £35bn since March.

There has also, of course, been some £35bn of spending on the furlough scheme to keep people in jobs and a host of large grants for businesses and tax cuts.  

Yet the latter are temporary expenditures and direct transfers from government to businesses and individuals rather than additions to department’s budgets.

A key question how much of the new coronavirus related public service spending (mainly money for the health service) is likely to be permanent? Will the test and trade infrastructure need to be permanent? Will the government need to subsidise the now massively under-capacity train operating companies indefinitely?

If a quarter of this new expenditure becomes permanent, the IFS calculates it would eat up almost half of the increase in government departments’ budgets that had been pencilled in over the next four years in March.

The Conservatives in their manifesto has already made major high-profile public service spending commitments for the NHS, schools and to recruit more police officers.  

If one assumes that they keep these promises within the smaller implied spending envelope that would require further austerity for other lower profile public services such as housing, justice and culture to make the sums add up.

One might have assumed that the spending envelope will be widened in due course to enable the government to deliver on its commitment to end public spending austerity and to also accommodate any permanent extra health spending related to the pandemic.  

Ministers could raises taxes to make this possible. Or the government could commit to a running a larger deficit.

Yet in July, when the government announced this autumn’s spending review, there came a strong hint that the chancellor intends to respond to the additional spending pressures from the coronavirus economic crisis by making the spending envelope for departments smaller, not larger.

The Treasury, at that time, warned of looming “tough choices” for areas of spending beyond health and education and policing.  

And the firm public service spending increase commitments made in the Budget were replaced with much weaker talk of merely increasing public service spending after accounting for inflation over the spending review period.

There are also hints of further pay “restraint” for public sector workers, after a decade of freezes and real terms cuts.

There is a consensus among public finances experts that public services, after a decade of cuts, are in no condition to absorb another round of budget reductions over the next four years without disastrous decline in quality and staff morale.

Outside of health, real-terms public service spending was cut by a fifth over the decade to 2020.  

The budget of the housing department has been cut in half in real terms per person, justice is down 30 per cent and culture is 20 per cent lower.

The Conservatives campaigned in 2019 on a pledge of not raising income tax, national insurance or VAT, which together account for two thirds of tax revenues.

Yet analysts believe there is little scope to raise serious new funds in taxation without tapping theses sources.

The government thus finds itself trapped by its twin pledges of not raising major taxes and ending public sector austerity.  

There is also the looming possibility of a no-deal Brexit in January which could have seriously damaging economic impacts and impose fresh spending demands on certain departments.

That’s why the chancellor might well follow the advice from the IFS and other experts and outline only a single year spending review this autumn – setting department budgets just for 2021-22- rather than the three-year one originally envisioned.

When politicians find themselves with no room for manoeuvre it can be sensible – as well as natural – to play for time.