Health and old age set to account for over 40 per cent of state spending by end of the decade

Share of spending on education and economic development set to fall to its lowest level on record

The share of state spending on old age and health is set to be more than twice that allocated to education and economic development combined by the end of the parliament – up from only 50% more pre-crisis – according to new analysis published today (Tuesday) by the Resolution Foundation.

The Foundation’s investigation of the changing size and shape of the state shows that deficit reduction is being achieved largely through spending cuts, with government revenues remaining broadly flat. Spending as a share of GDP is set to fall towards its historic low of around 36 per cent of GDP by the end of the decade.

While attention has focused on the magnitude of cuts facing the public sector, the profile of spending is also changing considerably. A decade of cuts are projected to come to an end in 2019-20, by which time departmental spending (RDEL) will have fallen by 14 per cent, but the size of reduction varies considerably across government. The Chancellor yesterday announced that the communities, environment and transport departments are set to face cumulative cuts to RDEL of over 50 per cent by the end of the next Spending Review period. Similar cuts are projected for other departments yet to agree their budgets, including business, justice and work and pensions. In contrast, spending on the NHS is set to rise by 14 per cent or more over the 10 year period.

The shift means that by 2019-20 health resource spending (40 per cent of RDEL) is projected to be two and a half times the size of 15 government departments – including business, justice, work and pensions, local government, the home office, culture, and transport – combined (16 per cent). In 2010, the health budget was slightly smaller than these other departments.

The move towards health – and away from areas such as post-16 education and R&D – raises questions about the future role of the state in boosting productivity and supporting young adults, says the Foundation. The government has a welcome commitment to maintain capital spending as a share of GDP, but this will still leave public investment well down on historic trends and low by international standards.

The analysis also highlights a big shift in non-departmental spending since the financial crisis, which is due to rise slowly over the parliament.

It finds a growing generational gap in welfare provision since the crash, with average spending per-head set to fall by 12 per cent for children and 9 per cent among working-age adults. In contrast, per-head spending on pensioners will rise by around 19 per cent over the same period.

The Foundation notes that by end of this decade spending on pensioner benefits will account for over half of all welfare spending. This is despite the big shift in welfare spending towards pensioners being cushioned to some extent by significant increases in the state pension age (SPA) since 2010, culminating in the SPA rising to 66 for men and women in 2020. Continued demographic changes post-2020 are likely to exacerbate the shift in welfare spending towards pensioners.

The direction of departmental and welfare spending means that the overall share of state spending on old age and health is set to reach 43 per cent by 2020, a rise of around a quarter since 2007 and a new high for the UK. In contrast, the share of overall state spending that goes on education and economic development (including house building) is set to fall by around one-fifth over the same period to 19 per cent – its lowest share since comparable data began in 1997.

Matt Whittaker, Chief Economist at the Resolution Foundation, said:

“The details of the final four years of the Chancellor’s decade-long fiscal consolidation programme, due to be set out on 25 November, will have profound implications. Not only is the state set to be significantly smaller than we’ve been used to by the end of the decade, but the profile of what the state does is also fundamentally changing.

“The focus on spending cuts as the driver of deficit reduction, combined with protections for areas such as health and pensioner benefits, has created a big shift in state support towards older people – and away from children and young adults.

“This relative growth of state spending on health and old age – and withdrawal from areas such as post-16 education, housing and economic development – also raises big questions about the state’s role in supporting productivity growth.

“While the focus of the Autumn Statement will largely be on how the pain of spending cuts has been spread around departments – as well as any changes to tax credit reforms – it’s important to step back and consider what the Chancellor’s plan means for the long-term role of the state, and the support it provides across different parts of the population.”