Up to £17bn of spending cuts are hidden in Rishi Sunak’s mini-budget because of soaring inflation, the Treasury watchdog is warning – casting doubt on claims that austerity is over.
The chancellor’s spring statement contains a poison pill for Whitehall departments because allocations were made in cash terms and will now be severely “eroded”, MPs were told.
The squeeze threatens to hit schools struggling to deliver catch-up support to pupils who missed lessons because of Covid and hospitals hit by a record patient backlog.
And it also spells bad news for public-sector workers, whose pay is likely to be cut sharply in real terms, the Office for Budget Responsibility (OBR) said.
Richard Hughes, the OBR’s chair, agreed “the spending power of departments” would be hit by the chancellor’s decision to make allocations in cash terms – as inflation is set to reach close to 9 per cent.
“It does erode the real value of those other budgets compared to what was anticipated when set back in October,” he told the Commons Treasury committee.
That “erosion is anywhere between £5bn and £17bn”, Mr Hughes added, depending on which measure of inflation is used to make the comparison.
He said the Treasury had yet to reveal its full hand for public sector workers, but they should expect the “lowest-based pay rises”, far short of protection against inflation.
During the evidence session, the OBR also:
* Said the real-terms cuts to benefits from failing to uprate with inflation are worth £12bn – while Mr Sunak is handing back only £0.5m to a bigger help fund for local councils.
* Agreed the 5 per cent fall in the value of benefits is likely to be “a record” – telling MPs it “can’t recall” one on the same scale.
* Acknowledged pensioners and other benefit claimants will be see their living standards fall further than earners.
* Warned it could take 18 months for benefits to catch up with rising inflation – because they are going up in line with just a 3.1 per cent rise in prices, from last September.
* Said Mr Sunak had “headroom” of £15bn – of which he has allocated around £10bn for the income tax cut in 2024, with the rest set aside.
Mr Sunak has faced a storm of criticism for failing to help households facing the biggest squeeze in living standards since records began in 1956-57, according to the OBR.
A further 1.5 million people will be plunged into absolute poverty, including half a million children, the Resolution Foundation think-tank warned.
The hidden spending cuts threaten a fresh bust-up between the chancellor and Boris Johnson – who has promised voters that austerity is over.
