Spectre of return to austerity raises alarm in Whitehall

Whitehall officials and trade unions expressed deep concern on Thursday over the prospect of a fresh round of austerity as Liz Truss’s government promised to enforce “iron discipline” over public spending in a bid to restore its battered fiscal credibility.

Despite pledges by ministers that the government would stick to existing spending plans, Whitehall insiders said departments were being warned of a fierce new squeeze on budget settlements that have already been eroded by inflation.

Chris Philp, Treasury chief secretary, indicated he would not be uprating state pensions and welfare benefits in line with inflation © Tolga Akmen/EPA/Shutterstock

“Whitehall finance directors are being told to prepare for cuts,” said an insider familiar with the discussions, warning that spending on capital projects and research and development would be the early targets for savings.

Chris Philp, Treasury chief secretary, who on Wednesday indicated he was eyeing further savings by not uprating state pensions and welfare benefits in line with inflation next April, warned that the government would be seeking “efficiency savings” in Whitehall spending.

“There is going to be iron discipline in terms of sticking to the existing spending plans . . . we’re going to make sure we do not exceed those targets and we’re going to make sure that money is spent on the critical public services,” he told the BBC.

In 2021, when departmental spending plans were set for the three years ending in April 2025, the then chancellor Rishi Sunak boasted that he had consigned austerity to history.

Line chart of Departmental spending per head in real terms, 2009-10 = 100 showing Austerity last time

“The Conservatives are the real party of public services,” Sunak said as he put in place plans for day-to-day spending to rise 3.3 per cent ahead of inflation each year.

Those figures were based on expected inflation of 4 per cent in 2022, falling rapidly back to 2 per cent. But with higher inflation this year, departments are already feeling the pinch and will deliver less than hoped before the next election.

And with the cost of servicing UK government debt rocketing after chancellor Kwasi Kwarteng’s “mini” Budget last Friday, leading economists warned that deep spending cuts could yet be required.

Line chart showing Resource Departmental Expenditure Limits in billions of pounds, in constant 2021-22 terms showing that inflation is already cutting into departmental budgets

Mark Carney, former governor of the Bank of England, said the government had failed to show how it would balance the books by refusing the usual independent forecasts alongside Kwarteng’s fiscal statement. “Maybe the way that numbers are going to add up is through spending cuts, as yet unspecified,” he added.

These plans are likely to be severely affected by the fiscal statement, which has cut taxes, increased borrowing and made the task of reducing the nation’s debt burden more difficult.

Ministers are likely to adopt a target of reducing debt as a share of national income in five years, which requires the budget deficit to be not much more than £60bn a year.

The Institute for Fiscal Studies, a think-tank, has estimated that the tax cuts alone are likely to leave the government borrowing over £100bn a year into the medium term.

The Resolution Foundation think-tank estimated that the level of cuts needed to bring the public finances under control would be the same as those announced by the then chancellor George Osborne in 2010 that started a decade of austerity, and similar to the £45bn of tax cuts announced by Kwarteng last week.

Mark Carney former governor of the Bank of England, said the government had failed to show how it would balance the books by refusing the usual independent forecasts © Charlie Bibby/FT

The prospect of renewed spending cuts has caused union leaders to demand the prime minister and Kwarteng give a “cast-iron assurance” that they will not impose fresh austerity on the public sector to fund their fiscal plans.

Eighteen unions representing millions of public sector workers, many of which are currently involved in strike action, said in a joint letter on Thursday that imposing further austerity to fund tax cuts for the rich would be “an act of national vandalism”.

“After 12 years of cutting services to the bone, there is nothing left to trim,” said Frances O’Grady, general secretary of the Trades Union Congress.

TUC general secretary Frances O’Grady said that ‘after 12 years of cutting services to the bone, there is nothing left to trim’ © Grainne Quinlan/FT

But across Whitehall, senior civil servants said they were bracing for deep spending cuts. “Basically ‘efficiencies’ means working out anything in the Budget that is not already spent or legally locked in, and then cut it,” said one official.

Thomas Pope, deputy chief economist at the Institute for Government think-tank, said that it would be difficult to cut day-to-day spending without hitting public services.

But he added there was more scope to trim capital spending which was increased by £15bn a year in the current spending review period.

Pope said that to make a difference, cuts must fall on departments with the largest budgets, including transport, defence, health, education and business, which includes research and development funding that is scheduled to rise from around £15bn in 2021-22 to £20bn in 2024-25.

Public sector groups said they feared potential targets could include a £35bn railway building programme, school and hospital repairs, and science programmes like the £6bn set aside over three years to fund UK participation in the EU’s flagship Horizon Europe partnership.

The government could also expedite its plans to cut 91,000 civil service jobs, according to Mark Serwotka, general secretary of the Public and Commercial Services Union. “When a government minister says ‘efficiency savings’, everyone knows they mean ‘job cuts and privatisation’,” he said.

Bar chart of Departmental Expenditure Limits (2022-23, £bn) showing Any substantial cuts will have to come from a few departments

But feared cuts to capital projects risk undermining Truss’s existing commitments, including increasing defence spending to 3 per cent of gross domestic product from 2 per cent.

Austerity has left many areas of public estate crumbling. Capital spending on education, which was estimated at £5.6bn in 2021-22, has declined by 29 per cent in real terms since 2009-10, according to a House of Commons Library analysis in March.

Still, health leaders said they feared that the capital budget will prove an easy target for cuts, after years in which it has regularly been raided to fund day-to-day spending.

Miriam Deakin, interim deputy chief executive of NHS Providers, which represents NHS organisations in England, expressed concern about whether a 2019 Tory manifesto pledge to build 40 new hospitals would be delivered.

Plans were moving “at a glacial pace” and “the longer the delays, the more costs are spiralling in the construction industry and the more the uncertainty grows”, she added.

Reporting by Peter Foster, Chris Giles, Delphine Strauss, Sarah Neville, Bethan Staton, William Wallis, Philip Georgiadis, Jane Croft, John Paul Rathbone and Clive Cookson

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