The fiscal outlook for the UK in 2024 looks challenging. Inflation, and other issues, suggest that budgets are going to be tight in the public sector.
In the last few years, there has been a steady flow of local authorities serving section 114 (bankruptcy) notices or hinting that they are not far from doing so. Some argue that the crisis is due to progressive funding cuts, while others claim that local authorities have taken on excessive risks and forgotten basic financial discipline. What cannot be doubted is the significant impact of inflation on energy costs and wages - two major outgoings in public sector budgets.
The Institute for Fiscal Studies (IFS) recently released some analysis on the financial prospects for the upcoming period, and how the UK’s position has changed in relation to 36 comparator countries.
Spending
In 2001, UK spending was 8% of national income below the G7 average, dropping to 1.2% in the noughties. The gap widened with austerity then closed with the COVID response. Forecasts put spending at 2.4% of national income below G7 average in 2024/25.
Revenues
In 2001, revenues were 5% of national income lower than the comparator countries’ average. By 2029 the gap is forecast to close to 1.5%. A forecast 5.6% increase in spending is predicted for 2001-29 relative to the G7 average. In the same period revenues are forecast to rise by only 2.5% generating a potential fiscal deficit.
Borrowing
In 2001, the UK had a budget surplus, but since 2005 it has been in the 10 highest budget deficits. Borrowing reached 10% of national income in 2009 then fell to G7 averages during austerity. Following COVID the UK had the second largest deficit in 2020. By 2029 it is forecast to have dropped to 8th largest. Debt is forecast to be 5% of national income above the G7 average in 2029, and 55% of national income above the larger comparator group.
These figures confirm a serious tightening of the fiscal position in the last two decades and they expose a conundrum highlighted by the upcoming general election.
The government is under pressure to reduce taxation levels, and commitments to cut taxes already feature in the Conservative party manifesto for the election. These would make any potential fiscal gap even wider than predicted.
It seems likely that the winners of the election will have new initiatives they wish to undertake. That may well require protection or even increase of revenues. This is not a party-political point as there are always pressures to increase spending. A recent example was the commitment to raise defence spending to 2.5% of GDP by 2029.
The conundrum for all politicians is how to provide improved quality public services, keep debt under control, and reduce tax levels at the same time. Pulling off that trick would be a very impressive performance indeed!
Public sector
This has serious potential repercussions for the public sector.
The NHS provides a case in point. Recent analysis by the Health Foundation concluded that inflation has resulted in NHS England budgets in 2023/24 being £3.5 billion less than 2022/23 in real terms (a drop of 2.1%). This is due to decrease by a further £1 bn in 2024/25.
Inflation will continue to nibble away at NHS and other public sector budgets. Public finances will be further stretched as some specific elements have seen cost pressures above current rates of inflation. For example, the maintenance of the triple lock pension (up to 8.5% from April 2024) means that there is less to go around for everyone else. Price variations in pharmaceuticals and medical supplies, both of which elements have high value budgets, can also be significantly larger than general rates of inflation.
Changes in practice compound the difficulty in the NHS. New practices can have massive positive effects on patient care, but often come with a large price tag. Thus, it is misleading to simply compare this year’s budget to last year’s plus general inflation!
Hopefully, politicians of all persuasions are open and honest with their agendas. Similar situations in the past have resulted in calls for "efficiency savings" with very undeveloped ideas on how to achieve those.
It seems likely that many public sector budgets will be under heavy scrutiny going forward. It has been a difficult time for public sector staff — including many a finance department — in recent years, and unfortunately at this stage, it seems unlikely that this will change much any time soon.
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