The Chancellor has binned austerity and his fiscal rules with the biggest increase in public service spending since 2004

The Chancellor today ended austerity by announcing a £13.4bn increase in public service spending, and in practice tearing up his fiscal rules, the Resolution Foundation said today (Wednesday) in response to the Spending Round.

The Foundation notes that the Chancellor’s spending package for 2020-21 equates to a 4.1 per cent real-terms increase in day-to-day departmental spending. This is the biggest increase since 2004, and ensures that no departmental budget in Whitehall will fall next year, with most experiencing significant real-terms increases.

The scale of the spending increase announced today means that a third of the current departmental spending cuts (RDEL per capita) introduced since 2010 have now been reversed, though the legacy of austerity still looms over many departments.

The Foundation notes, for example, that while health and social care departmental spending next year is 14 per cent higher than its 2009-10 level, annual spending across the Housing and Communities and Justice departments will respectively remain 52 and 31 per cent lower next year than they were a decade ago.

The decision to open the spending taps next year will be paid for by higher borrowing. The Foundation notes this is perfectly possible given record low borrowing costs, and with the deficit at its lowest level in 17 years. However, it is not likely to be consistent with the government’s fiscal rules.

The Foundation says that the scale of extra spending means the Treasury is almost certain to have broken the ‘fiscal mandate’ to keep borrowing below two per cent of GDP next year.

On the basis of the last forecast from the Office for Budget Responsibility (OBR), published in March, the Chancellor’s £13.4bn spending increase could have just fitted within his £14bn of fiscal headroom. However, higher borrowing and slower growth since March mean that his headroom is now likely to be far less than today’s spending increase.

Future plans for up to £20bn of tax cuts, alongside the Chancellor’s clear commitment to further increases in capital spending later this year, mean the Chancellor is also likely to struggle to maintain the longer term fiscal rule of having debt continue to fall as a share of GDP – which the Prime Minister recommitted to in recent days.

The Chancellor’s speech largely recognised that his new plans mean that the existing fiscal framework’s time has come, and announced a welcome review of that framework for later this year.

Torsten Bell, Chief Executive at the Resolution Foundation, said:

“The Chancellor has binned both austerity and his fiscal rules, bringing down the curtain on the era of public spending constraint in spectacular fashion by announcing the biggest increase in public service spending since 2004.

“The Chancellor has reversed a third of the public service spending cuts announced since 2010. But the legacy of austerity still looms over some departments and public services, with their Budgets remaining down by over a half.

“By borrowing to pay for his extra spending, and ignoring the recent deterioration in the UK’s economic and fiscal outlook, the Chancellor has effectively torn up his fiscal rules – promising to put something new in their place later in the year.”