NIESR: What the Chancellor’s Spending Round should focus on

4 Sep 2019 10:27 AM

Today, the Chancellor will announce the results of the fast-tracked Spending Round and set departmental budgets for the 2020-21 financial year. This Press Note highlights where spending priorities should be set.

Main points

This fiscal event undermines the fiscal framework. It comprises a one year review without the longer horizon required for government plans. It also does not have support of an OBR forecast or the fundamental tax review for which NIESR has called. It also should articulate the fiscal responses or space to respond to a no-deal Brexit. By concentrating on short-term initiatives there is a danger that it is seen as a re-election spending spree that does not address long-term economic challenges.

The Chancellor will be right to prioritise additional spending on education, health care and public order and safety as these areas have suffered most from underspending during the last decade and a deterioration in public service quality.
A significant part of departmental spending would need to be allocated to public sector pay in order to reduce the public sector wage gap and maintain staff quality.
A no-deal Brexit would require a substantial re-allocation of resources towards contingency measures and funding to help the country transition to a new trading relationship with the EU.
Education spending should target intermediate and higher technical skills to help fill skills gaps when the UK leaves the EU labour market and create new progression routes for people with Level 2/3 vocational qualifications. The other top priority is to invest in ‘doubly disadvantaged’ young people affected by childhood poverty and with low education attainment, many of them Not In Education, Employment or Training (NEET) in their early twenties.
In the light of the £20.5bn earmarked for NHS spending in June 2018 this Spending Review will, we hope, specify how this money will be targeted.
Higher spending and a weaker economy, in particular in the event of a no-deal Brexit, would require an overhaul of the fiscal rule framework.

Spending needs

NIESR has argued for some time that after a decade of fiscal restraint, government spending as a share of GDP will have to rise to meet the requirements of an ageing population and maintain the quality of public services. Total amanaged expenditure will need to remain near its long-term average of around 40 per cent rather than to fall as forecast by the Office for Budget Responsibility in spring.
In particular, non-protected spending on education, health, and public order and safety has in the last 10 years been insufficient compared to what would have been warranted (figure 1). This has contributed to a deterioration in the quality of public services (figure 2).

Figure 1. Estimated over- and under-spending, selected areas	Figure 2. Quality of public services

Source: NIESR estimates. Chart shows difference between real total managed expenditure per capita and estimated warranted level by year.	Source: Office for National Statistics and NIESR calculations, indexed.

In addition, NIESR estimates suggest that public sector wages currently lie around 3 per cent below their long-run trend levels. This means that after last year’s lifting of the public sector pay cap, the pressure to further raise pay in order to maintain staff quality continues to be high. With a public sector pay bill of around £180 billion, closing the gap would cost some £6 billion per annum and departmental budgets would have to reflect this increase.
A no-deal Brexit would require a substantial re-allocation of resources not only to fund short-term contingency measures but importantly also to support the economy in its transition to the new trading environment, for instance through re-training and active labour market programmes aimed at keeping people in work as well funding for industries and regions most affected, see here.

Education spending priorities

Education spending needs to reverse the long-term decline observed across the general and vocational eduction tracks in Sixth Forms and Further Education (FE) Colleges since 2010.
Between 2010/11 and 2015/16 spending per student in FE has fallen by 7% in real terms, with plans for a further decline of about 13%.
For Adult Education (19 and over), spending fell by almost 10% in real terms, from £3.91 billion in 2011/12 to £3.71 billion, and was focused on learners with very levels of skills, while budgets for higher levels of skills from “24+ Advanced Learner Loans” were never spent in full.
NIESR recommends specifically:
- Additional expenditure to improve intermediate and higher technical skillsavailable in the economy, which have high benefits for workplace productivity, but also for individual earnings, wellbeing and communities. This is particularly important when the UK formally leaves the EU’s common labour market, which helped fill skills gaps, especially for small and medium size enterprises (SMEs).
- Improving the offer for higher vocational education, which is an important progression route for young people from intermediate technical qualifications to highly skilled jobs and has earnings and productivity effects akin to degrees.
- Improving the situation of the 25% with at best Level 1 qualifications by age 25, a finding by NIESR and CVER cited in the Augar review. Often affecting young people from disadvantaged families creating a double disadvantage of low qualifications and childhood poverty, observing many of them as Not In Education, Employment or Training (NEETs) means enormous economic losses and social inequality.
Finally, NIESR strongly argues that education spending needs to be understood as an investment, and that independent research needs to be adequately resourced and access to data provided to evaluate the effectiveness of policy.

Health spending priorities

Back in June 2018 the (then) Prime Minister announced a package of £20.5bn increase in spending over 5 years on the NHS which would ensure a 3.4% real increase in spending per year up until 2023/24. She made it clear that this was money for the NHS and not for Social Care. For Social Care, she said there was to be a new Green Paper published setting out a new way of funding. No timeline was given for this report. It also appears that some £1.25bn of this ‘new’ money is already committed to ‘specific pension pressures’ in the NHS.

Assuming that:

there may not be any further ‘new money’
that the £20.5bn was indeed ‘new money’
and setting aside the issue of whether this funding will be enough to address the main problems in the NHS finances.

It will be very interesting to see what plans have been laid out for how this £20.5bn might be spent in the short run.

The main challenge for NHS funding is how to improve the cost efficiency of the NHS to improve the offer to patients and other service users in the light of mounting demographic pressures of an ageing population. The priorities for this targeted spending should be:

Decreasing unscheduled attendances in hospitals (i.e. A/E); these lead to unscheduled admissions. Inappropriate unscheduled (unplanned) secondary care activity is the most important measure of how well our social and healthcare system operates and is a major determinant of inappropriate (low effectiveness and high cost) expenditure.
Decreasing clinically inappropriate planned hospital attendances i.e. out patients and specialist, hospital based investigations.
Investing in community based services which enhance the autonomy of the individual and improve their health and well-being- i.e. invest in general practice, social care and other community care
Ensuring genuine parity of investment in trying to resolve physical health problems and disorders of an essentially psychological nature, the latter include smoking, alcohol and drug misuse (prescribed and illicit,) chronic psychosomatic disorders, health anxiety and worsening outcomes from ‘physical’ long term conditions such as obesity, diabetes and asthma.
Recognising the impact of poverty, lack of education and other socioeconomic stresses on inappropriate use of NHS resources - inappropriate because the underlying disorder is not driven primarily by physical but by socio economic factors - these cannot be solved using the scientific/ physical / pharmacological paradigm which the NHS follows. This results in waste of resources whilst the fundamental issues are not tackled (knife crime and opioid abuse are obvious examples).

But since most of these priorities lie at the interface of Social Care and NHS spending then we may have to wait for the new Green Paper on Social Care funding to piece together the full picture.

Fiscal and macroeconomic implications

With borrowing costs at a historical low, higher spending can somewhat more easily be financed through higher deficits but this would be incompatible with the Chancellor’s stated aim of “meeting the existing fiscal rules”, as discussed here.
This is because the economy is now weaker than forecast by the OBR in March which is likely to have already eliminated most of the headroom of 1.2 per cent of GDP against the government’s fiscal mandate of keeping net public sector borrowing, adjusted for the business cycle, below 2 per cent of GDP.
The new treatment of student loans in the national accounts, and spending promises already made further add to the fiscal deficit, as would the type of tax cutsproposed during the Conservative leadership campaign (figure 3, more detail here).
A no-deal Brexit, estimated to generate a revenue shortfall of at least £20 billion a year within the next three years (1 per cent of GDP), would require a of full overhaul of the fiscal rule framework.

Figure 3. Public sector net borrowing

Source: ONS, OBR, IFS, NIESR.

Notes for editors:

A number of NIESR staff are available to comment on this Press Note. For further information and to arrange interviews, please contact the NIESR Press Office:

Luca Pieri on 020 7654 1931 / l.pieri@niesr.ac.uk

NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.

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