Struggling public services face billions more in spending cuts because Liz Truss is set to crush hopes that budgets will be topped up to cope with soaring inflation.
On the campaign trail, the future prime minister suggested she would hold an emergency spending review – with allocations having been made when prices were expected to rise by a peak of just 4 per cent.
With inflation now around 10 per cent, the Institute for Fiscal Studies (IFS) has warned an extra £18bn will be needed in each of the next two years to restore “the real-terms generosity that was intended”.
But Ms Truss is now believed to have dropped plans for the review – even as the chancellor promises further tax cuts – in a move also likely to hold down public-sector pay increases.
The decision comes despite growing alarm over the record NHS patient backlog, existing cuts to school spending, the crisis in social care and massive delays in the justice system.
Paul Johnson, head of the IFS, told The Times: “It is pretty extraordinary. There’s a real problem for schools and hospitals doing even the pay rises that they’re doing. It’s going to be a real squeeze.”
Torsten Bell, of the Resolution Foundation thinktank, said: “The reality of double-digit inflation will tightly squeeze the budgets of schools and hospitals, as well as households.
“Higher-than-expected energy bills and pay rises being absorbed within existing budgets will mean tough choices for those delivering those services.”
George Osborne, the architect of the austerity programme as the Tory chancellor in the last decade, criticised “schizophrenia”, telling Channel 4: “You can’t have small-state taxes and big-state spending.”
On Friday, Kwasi Kwarteng announced an extraordinary £45bn package of tax cuts on in a gamble for growth, scrapping the 45p income tax rate on top earners and the cap on bankers’ bonuses.
On Sunday, he said there is “more to come” in a full budget likely to be next year, with increases in the annual allowances on pension pots and higher income tax thresholds being considered.
Inflation is now at 9.9 per cent and is expected to rise to 11 per cent in the autumn, remaining at a similar level for much of next year.
Mr Bell added: “In the longer term, there are clear trade-offs between the £45bn tax cuts announced last week and the quantity and quality of public services.”
A Treasury spokesperson said: “While driving economic growth and tackling high inflation, we will continue to take a responsible and disciplined approach to spending.
“It’s more important than ever that departments work efficiently to manage within existing budgets, focusing on unlocking growth and delivering high-quality public services.”
