Up To £35 Billion In Additional Spending Pressures This Year Wipes Out Headroom, Creating Difficult Choices For Autumn Budget

30th July 2024

The Chancellor this afternoon unveiled a £35 billion laundry list of spending pressures for 2024-25 - more than enough to wipe out existing headroom against getting debt falling in five years' time. This leaves her tough choices for the Autumn Budget if she is to increase growth and bring down debt, the Resolution Foundation said today (Monday).

These spending pressures, all of which are additional to the plans for public spending set out by the previous Chancellor at the March 2024 Budget, include: increased public-sector pay awards (£9.4 billion); a higher cost of processing asylum claims (£6.4 billion); and higher payments to rail operators (£3 billion).

£35 billion is an upper bound on these extra costs, as the Treasury do not expect it will all need to be spent. But it is considerably larger than the planned reserve that HM Treasury allocate for unanticipated spending pressures - which was £9 billion this year.

The biggest item in the new pressures came from the Chancellor's decision to accept recommendations from the public sector pay review bodies. As a result, public sector workers can expect an average pay rise of around 5.5 per cent in 2024-25 – worth around £2,000 a year for the average public sector worker. But the Foundation notes this will still leave public-sector pay rises falling behind the private sector, leaving the average public sector worker £1,000 worse off than if they had seen the same pay increases as the private sector since Q4 2019.

To help pay for these additional pressures, departments will be asked to make £3 billion of savings, and the Government will make additional savings by beginning asylum removals, by not implementing the previous Government’s social care reforms, and by not proceeding with some transport investment. The Government will also stop paying Winter Fuel Payments to pensioners not in receipt of means-tested Pension Credit, saving £1.4 billion this year.

Today’s assessment looked only at spending pressures in the current year, but many of these, including the extra spending on public sector pay (£9.4 billion), will continue throughout this Parliament. As a result, even after today’s new cuts to public spending, the Foundation notes that the Chancellor faces a huge challenge to bring down public sector debt without cutting unprotected departmental spending by more than the £18 billion a year already pencilled in to the government finances – or adding to the £23 billion a year tax rises announced by the previous Government that have not yet come into force.

The Chancellor’s challenge in the autumn Budget will become even more severe if she wishes to maintain even modest fiscal buffers – or if bad news about the growth or interest rates materialise in the Office for Budget Responsibility’s (OBR’s) Autumn Budget forecasts. If the OBR was to mark down its forecast for trend productivity growth by just 0.2 percentage points, it would blow a further £17 billion hole in the public finances.

The Foundation warns that, when delivering the autumn Budget, the Government must continue to prioritise its growth ‘mission’ and focus on increasing living standards. Today’s announcements included cuts to some transport investment and £1.5 billion cuts to Winter Fuel Payments. If this approach was repeated at the Autumn Budget, this would both hamper growth, and damage living standards.

Finally, the Chancellor also announced welcome changes to the Budget process, including new powers for the OBR that will allow it to announce when it thinks the Government is on track to breach departmental spending limits. These powers, plus a new requirement to hold three-year spending reviews every two years, are welcome moves that should end the practice of using ‘fictional’ spending plans to meet fiscal targets.

James Smith, Research Director at the Resolution Foundation, said:

"The Chancellor has unveiled as much as £35 billion in additional spending for this year, effectively wiping out any ‘headroom’ against getting debt falling in five years’ time, leaving her facing tough choices on further tax rises or spending cuts at the Autumn Budget.

"Any further reductions in public spending would come in the context of more than £18 billion of cuts to unprotected departments currently implied by public-finance forecasts; and any new tax rises would add to the £23 billion a year in tax increases announced, but not yet implemented, by the previous Government.

“The Chancellor had good news for public-sector workers with an above-inflation pay rise this year worth around £2,000 for the average worker, alongside welcome reforms and new powers for the OBR that should prevent governments from funding giveaways through ‘fictional’ cuts."