UK Budget 2021: A balancing act of saving lives, saving services & saving the economy

Although the light at its end is now visible, the UK is still firmly in the tunnel of the Covid-19 crisis. Yesterday’s UK Government Budget confirms that the tunnel is turning into a tight-rope when it comes to public finances.

Corporation tax hikes and business investment incentives, alongside the continuation of emergency Covid-19 support schemes like furlough, dominate the headlines. However, we have dived a little deeper into the detail to look at the Budget’s complicated relationship with public services spending.

In the Chancellor’s Red Book – which outlines the tax and spend commitments he is making – the Government reiterates that in 2020-21 there has been over £100billion of pandemic spending on public services, £63billion of which went to frontline health services. The Red Book also points to £55billion worth of spending announced for public services as part of its Spending Review in November 2020. 

The UK Government spending watchdog, the Office for Budget Responsibility (OBR), agrees that what has already been spent over the past year or so is nothing short of historic. Government spending will reach levels never recorded outside of the world wars. Planned day-to-day spending by Government Departments – known as Resource Departmental Expenditure Limits (RDEL) – is forecast to have risen by 36% (£122billion) in 2020-21. But, with much of this financed by debt, and a Chancellor wanting to balance the books, what does the future hold for public services spending?

Virus-related spending allocations

Allocations for pandemic-related spending over the coming year are £56billion (a 15% rise on pre-pandemic RDEL) - less than half of the 36% uplift in 2020-21. Beyond 2022, there is no allocation for “virus-related spending”. Everyone hopes the Chancellor is correct in his bet that we will need less money for emergency measures this year and the virus will be a thing of the past by 2022. However, the lack of specific allocations for pandemic-related spending doesn’t mean that public services will be without the finances to deal with the consequences of Covid-19 if we are still fighting the virus, just that they will have to fund it from their general budgets.

In reality, if the fight against the virus takes a particularly bad turn, we would likely see the Chancellor back at the Despatch Box with a new set of spending plans. However, the assumptions relating to “virus-related spending allocations” are important to understand how the Government expects things to look in the medium-term and what they are basing their public finance policy decisions on.

Departmental spending – the need to embrace transformation

Stick with us here, as there are a lot of numbers coming your way. One of the standard ways economists measure public spending is presenting it as a percentage of the overall economic output of a country, or Gross Domestic Product (GDP). The fluctuations in Departmental Expenditure Limits outlined above means that – UK Government spending rises from 14.4% of GDP in 2019-20 to 21.2% of GDP in 2020-21, but then falls back to 15.3% of GDP in 2022-23.

As the OBR notes “the resulting increase between 2019-20 and 2022-23 is a slightly smaller rise than the Government had planned in its pre-pandemic Budget in March 2020.” In other words, the Government is committing to slightly less spending for public services in the medium-term than it had wanted to pre-pandemic. That said, historically, it is much more difficult to reduce spending following a crisis than it is to increase it during the event itself. Furthermore, as we explore later, the Chancellor may face many longer-term pressures created by the pandemic, and consequently the need for greater spending, even as the immediate health impacts of Covid-19 subside.

Nonetheless, if the Chancellor maintains his current trajectory, by 2023 most Departments will need to save between 1% and 2.8% (depending on decisions relating to foreign aid) as compared to the money allocated to them in 2021-22 excluding funding specifically related to the pandemic.

This approach is an inversion of what has become the norm when it comes to public spending and the Parliamentary cycle. Typically, Governments ramp-up spending as an election approaches, but the next scheduled UK election falls in the first half of 2024 – at which point Government spending would have been reined-in, according to this Budget.

Undoubtedly, the Chancellor faces a tricky balancing act. Public finances are precarious by any normal measure. Government borrowing is at a peacetime high of £355billion in 2020-21, and public sector net debt is set to peak in 2025-26 at 97.1% of GDP. Low-interest rates mean that this is not an immediate concern, but in his speech to the House of Commons the Chancellor alluded to his fears that just a small uptick in interest rates or inflation could be costly.

However, the choice between reductions in the provision of quality public services and an economy going bust is a false dichotomy. The omnipresence of the slogan ‘build back better’ shows the appetite there is to think differently about all manner of social, economic and policy questions. And although the fiscal pressures are inescapable, by retaining and expanding on the innovation forced by the pandemic, public services can be part of the effort to, as the saying goes, ‘build back better’. This will require governments to harness the best of the public, voluntary and private sector to deliver the services that citizens want, for a cost that is fiscally feasible.

Public services spending and the legacy of the pandemic

Although we all live in hope that the pandemic will be in the rear-view mirror sooner rather than later, we have to face up to the fact that the legacy of Covid-19 will likely have medium-to-long-term public services consequences that will need to be addressed.

As we know too well, Covid-19 is difficult to predict. Although the vaccine roll-out is bringing optimism that the circulation of the virus can be drastically slowed or even stopped, continued measures such as a system of testing and isolation may be needed well into the future. Health services also face a back-log, and as the OBR also points out, the impact of ‘long-Covid’ and mental health issues exacerbated by the pandemic may result in unforeseen costs.

The potential expense of a re-vaccination or cyclical-vaccination programme, that we know the Government is exploring as a result of its recently published ‘roadmap’, is also yet to be accounted for.

These ‘legacy costs’ of the pandemic are not confined to health. Transport, education and services provided by local government are all facing financial pressures that may well last long beyond ‘the end’ of the pandemic.

In the face of these challenges – alongside the fiscal pressures – public services will need to be different, more efficient and more effective. Citizens won’t accept quality to fall or provision to disappear.

The state has played a bigger role in people’s lives than most would have ever imagined. Salami slicing service provision in the hope of making savings is not feasible. Instead, government must embrace the opportunity to transform public service design and delivery. If done properly, citizens will gain more, while the government will need to spend less.

Driven by a sense of partnership, alongside fair and open competition, value for money and innovation can continue to be delivered in public services. Throughout this pandemic we have seen what effective cooperation between the public sector, voluntary sector and business can lead to – from the delivery of the Nightingale hospitals, to the vaccines that are our route out of the crisis. This partnership must be carried forward as the Government and citizens face the challenges – financial and social – that existed pre-pandemic, during the crisis itself, and those the virus is creating even as it recedes.

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