Rishi Sunak’s government has set the country on course for a “more painful” austerity drive after the next general election than during the decade of belt-tightening under George Osborne, leading economists have warned.
A day after the chancellor’s autumn statement, the Institute for Fiscal Studies said Jeremy Hunt’s £20bn package of tax cuts was almost entirely funded by swingeing real-terms reductions to public spending planned from 2025.
Having sought to blunt the highest tax levels since the second world war, details contained in the chancellor’s plans showed persistently high inflation would slash almost the same amount from public service spending power by 2027.
While the government is committed to funding for key areas – including the NHS, schools, defence and overseas aid – economists said unprotected departments would face deep reductions in their budgets without a rapid change in course. Those likely to suffer the most are further education, local government, prisons and the courts.
The IFS director, Paul Johnson, said major cuts would be harder to achieve because of the era of austerity kickstarted by the former chancellor Osborne when the Conservatives came to power after the financial crisis.
“That was painful. Doing it again will be more painful still. Mr Osborne made his cuts after a decade of big spending increases. Mr Hunt, or his successor, will have no such luxury,” he said.
Leading economists said the government spending plans lacked credibility amid ballooning demand on public services – pointing to record NHS waiting lists, pressure on prisons and courts, and rising needs in social care.
The numbers present a potential trap for Labour as Keir Starmer’s party faces increasing questions over how it would turn around struggling public services without adding to borrowing or putting up taxes.
“We know this is a trap; it’s the same one the Tories set us in 1997,” said one Labour MP, highlighting how Tony Blair went into that election pledging to match the spending limits set by John Major.
Labour has backed Hunt’s tax reductions, having agreed the tax burden on working households was too high. Rachel Reeves, the shadow chancellor, said on Thursday the party would focus on growing the economy to fund public services.
“That’s the number one mission of an incoming Labour government,” she said.
Despite cutting the rate of national insurance, overall levels of taxation are set to reach the highest level in 75 years, while inflation remains high and economic growth struggles for momentum.
Against this backdrop, the Resolution Foundation said it expected the average household to suffer a £1,900 hit to their finances by January 2025 compared with their position in December 2019, with families on course to be worse off at the end of a parliamentary term for the first time in modern history.
Defending his plans for the economy during a round of interviews on Thursday morning, Hunt acknowledged tax levels were rising, but said: “I did make a start in bringing down the tax burden, we can’t do it all in one go.”
Downing Street did not deny that big cuts would be needed to stick to the chancellor’s fiscal rules. But a spokesperson said public spending would end up higher by 2028-29 than it was in 2019-20, even accounting for inflation.
The spokesperson added that the autumn statement “was about striking the right balance in supporting the British economy, supporting the British public and maintaining political stability, which the chancellor and the prime minister have worked so hard on over the previous year.
“We’re confident we have struck that correct balance. Obviously, that requires making critical choices, particularly on fiscal discipline.”
Against a backdrop of weaker levels of economic growth and persistently higher inflation, Hunt’s autumn statement made little provision for the allocation of funding for public services after the current three-year spending review period, which expires in March 2025.
It also confirmed real-terms cuts to public investment – used to finance the building of schools, hospitals and roads – equivalent to £20bn a year.
Richard Hughes, the chair of the Office for Budget Responsibility, the UK’s independent economics watchdog, said there was a “big question mark” over the spending plans, which were unusual compared with other leading countries.
He said: “If the question is: can the government cut spending in real terms and as a proportion of GDP, the answer is yes. George Osborne did it in 2010. Is it plausible to do it in the future? Well, it depends on what kind of choices [the government] wants to make.
“In any other country in the world, if you look at their fiscal forecasts, they have details going out five years. In our framework, these things run out until the government makes a political decision to run a spending review. That’s not how it works in other countries.”
The IFS said that, if the government held to its funding commitments for protected departments, such as health and education, this implied a 1.8% cut for unprotected budgets each year from 2024-25 to 2028-29 – including for prisons, the courts system, local government and further education. After taking into account funding settlements for Scotland, Wales and Northern Ireland, it said the plans implied cuts of 3.4% in England.
While the government could raise public sector productivity to maintain service levels, economists doubt efficiency gains on such a scale can be achieved.
Ben Zaranko, a senior research economist at the IFS, said: “Unless you can find some magnificent, heroic productivity improvements in those areas, it seems likely the range and quality of public services would have to suffer at some point.”
