The Choice

After the quietest summer in Westminster since 2014 politics is back. We’ve already had two reshuffles and a crisis, with the government getting into all kinds of a mess over “crumbly concrete” in schools.

Alongside the daily circus, though, it’s important to keep the longer view in mind. Over the summer the IFS published an analysis of public finances and the tax system, which contained this extremely grim graph.

Based on Office of Budget Responsibility (OBR) analysis of economic trends and demographics it estimates that by the mid-2040s government will need to spend over 45% of national income on public services, benefits and debt repayments. By the 2070s it will be over 55%. This is mainly due to rising health, social care and pensions costs caused by an aging population and increasingly expensive medical treatments, as well as the cost of government Net Zero policies.

Note this takes the current government spending plans as a baseline, and they are a complete fantasy. That little drop in the dark blue dash line between 2025 and 2028 is never going to happen, even though all the parties are pretending it will until the election is over. It also doesn’t assume any increase in spending designed to improve the state of public services, or, say, increase benefits payments to reduce child poverty. It’s just what it would take to maintain the current standard. So it very likely underplays the extent of the problem.

It is, of course, just a projection. There are plenty of variables here that could mean things turn out differently. For instance if interest rates fall faster than expected that would reduce debt repayments. Most importantly if the economy grows faster that would help cover the costs. But equally things could get even worse. We’ve not been short of unexpected crises in recent years and the OBR have a historical tendency towards optimism.

The rising cost of the state – particularly for health and welfare – is not a new issue. In many ways the history of British politics over the last forty years is of governments trying every trick in the book to avoid taxpayers having to cover the bill. Thatcher and Major did it by using north sea oil money and returns from privatising utilities. Blair and Brown used PFI to keep infrastructure spending off balance sheet. These governments also benefitted from the “peace dividend” following the fall of the Berlin Wall, and were able to cut defence spending heavily (until the late 1970s we spent less on health than defence, now we spend four times as much.) 

Cameron and Osborne tried to hold costs down by cutting all spending other than health and pensions, while using quantitative easing to keep the economy afloat. But that strategy could only ever be a short-term one given other services can’t absorb annual cuts on a permanent basis. From 2017 onwards the government has had to start putting money back into schools, police, courts and so on to avoid everything falling over completely. On top of that Brexit, Covid and Ukraine have forced up borrowing and debt repayments.

All of which means whoever forms the next government has no escape routes left. There are no more utilities to privatise. PFI is now on balance sheet. There is nothing left to cut and, as the government’s school building troubles show, plenty of damage from the last round of austerity still to undo. Health costs rises are inevitable – another IFS analysis shows the recently published “NHS workforce plan” implies 3.6% additional spending a year beyond inflation (or £50 billion a year extra in today’s money by the mid-2030s). As are social care and pensions costs. Better than expected economic growth might improve things somewhat but the much heralded “difficult choices” are coming. And they really will be difficult this time.

So what are the choices available to the next government? In the rest of this post I’ll look at the main options and also what I suspect (fear) will end up happening.