strain increases on the public sector as Budget confirms another £2bn taken from services

20-03-14

The public sector suffered further cuts in the Chancellor’s budget as he confirmed that he would take another £1bn out of public funding through additional changes to public sector employee pensions.

This comes in addition to his decision to permanently take away £1bn of government departments’ underspends, some of which would have been money held back as a contingency. Both of these measures come on top of the already announced cuts to Government spending.

The Chancellor also announced that he would introduce a cap on welfare spending to come into effect in 2015/16 to be set at £119bn in its first year.

He explained that this was designed to help control Government spending, but in reality this move only covers a third of welfare spending, as spending such as the state pension and debt costs will remain outside the cap.

The Chancellor’s ability to balance this budget is critically dependent on the future path of interest rates. Government interest payments on UK debt are forecast to be around £59 billion in 2015-16, more than the budget of the Department for Education. Since the financial crisis interest rates have been at an historic low. Given our current level of debt a 1% increase in government bond yields would add around £8bn per annum to annual debt interest by 2018/19.

An increase would also put pressure on household budgets – a 1% increase in mortgage rates would increase the average mortgage bill by around £1000 a year. That will impact on people’s disposable incomes, limiting growth and in turn the Government’s revenue projections.

Other measures announced included:

  • £200m for local authorities to repair potholes, which is welcome, though local authorities currently estimate they face a £10.5 billion backlog of road repairs and that they need around £840m to repair this year’s damage.
  • A welcome increase in the amount that the Public Works Loans Board can lend to local authorities from £70bn to £95bn.

Speaking on the Budget, CIPFA’s CEO Rob Whiteman said:

 “It is welcome that this budget has focused on hard pressed savers and those approaching retirement, however a great deal of these measures have come at the expense of front line services with £2bn taken out of future funding by the Chancellor today.

 “Meanwhile the Government is underestimating the needs of local authorities with small measures on roads, loans and house-building which, while welcome, do not go nearly far enough. If we are to repair the damage done to our roads properly, and build the infrastructure we need for growth, we must see much more constructive and far reaching measures from Government.

“The announced cap to welfare spending could also be problematic as it excludes the majority of welfare spending and is only likely to come into full effect during an economic downturn which will put pressure on local services at a time when budgets are tight and people and communities are at their most vulnerable.”

ENDS