Labour spending plans mean £9 billion of cuts after next year, economists warn

The Government will need to raise up to another £9 billion after next year to avoid cutting spending on unprotected departments, economists have warned.

Giving a press conference the day after Rachel Reeves delivered her Budget, the Institute for Fiscal Studies (IFS) warned further tax rises could be announced in later budgets.

It comes as the SNP issued warnings over child poverty, and the founder of a private care home company warned the sector had been betrayed.

Wednesday’s budget set out how day-to-day spending is set to rise rapidly, increasing by 4.3 per cent this year and 2.6 per cent next year, before slowing down to just 1.3 per cent per year from 2026.

Paul Johnson, director of the IFS, explained keeping to a 1.3 per cent increase will be “extremely challenging, to put it mildly” and Ms Reeves’s plans “will not survive contact with her Cabinet colleagues”.

He said: “I am willing to bet a substantial sum that day-to-day public service spending will in fact increase considerably more quickly than supposedly planned after next year.

“1.3 per cent a year overall would almost certainly mean real-terms cuts for some departments. It would be odd indeed to increase spending rapidly this year and next, only to start cutting back again in subsequent years.

“I’m afraid, at least on the surface, this looks rather like the same silly games playing we got used to with the last lot – pencil in implausibly low spending increases for the future in order to make the fiscal arithmetic balance.”

Mr Johnson was critical of the previous Conservative government, whose own spending plans implied a £20 billion cut to unprotected departments after this year – something he said had “lacked credibility”.

In analysis published on Thursday, the IFS suggested the current plans require £9 billion of cuts to unprotected departments such as transport and the environment after 2025/26.

In light of this, Mr Johnson said there “must be a risk” that taxes will have to rise again, especially if the Chancellor does not receive good news on growth, debt interest or welfare.

He said: “If nothing else changes in the forecast (except spending), and particularly if we choose not to increase petrol duty, I think other taxes will have to rise.”

In separate analysis, the Resolution Foundation suggested unprotected departments will have to shoulder a similar level of cuts between 2026 and 2029.

Economists at the think tank noted that, while this is a “significant improvement” on former chancellor Jeremy Hunt’s plans, it is still “not enough to completely rule out a ‘return to austerity’”.

It said: “The Chancellor’s ‘envelope’ implies unprotected services collectively shouldering a further cut of £8 billion over the last three years of this Parliament.

“If it happens, their users might not accept that there has been ‘no return to austerity’.”

Downing Street denied tax rises will be needed to address the squeeze on departmental spending.

Asked if taxes will need to rise to avoid cuts, the Prime Minister’s official spokesman said: “No. The Chancellor set out the spending envelope over the course of this Parliament. It results in day-to-day funding growing an average of 2% per year in real terms.

“It is a significant increase in investment in our public services compared to the plans that this Government inherited, and it required a significant set of choices and trade-offs in the Budget yesterday.

“Obviously, the next spending review will set out departmental plans beyond 2025/26 and it will also set out a significant public sector reform agenda alongside that.”

Kirsty Blackman has written to the Chancellor and Prime Minister over child poverty

It comes as the SNP has called for the Labour government to take "emergency action" to tackle child poverty. In a letter to the Prime Minister and Chancellor, Kirsty Blackman MP said the failure to introduce any significant measures to tackle child poverty was "a glaring omission" and warned "the Labour government is actively choosing to push thousands of Scottish children into poverty by imposing damaging welfare cuts including the two child benefit cap and bedroom tax."

The SNP Work and Pensions spokesperson called an emergency package of measures including scrapping the two child limit, abolishing the bedroom tax, lifting the benefit cap and matching the SNP government's Scottish Child Payment UK-wide by raising the child element of Universal Credit by £26.70 per child per week. Her invention comes less than 24 hours after Shona Robison appeared to suggest the the additional £3.4 billion for Scotland in 2025-26 from the Budget to end the two-child cap.

In her letter, Ms Blackman MP writes: "It's a scandal that 4.3million children are living in poverty - and, what makes it worse, is that the Labour government is actively choosing to push thousands of Scottish children into poverty by imposing damaging welfare cuts including the two child limit, bedroom tax and benefit cap.

"Following the UK budget, we now know for certain the Labour government had more than enough money to act - it just didn't have the political will.

"Pushing this issue into the long-grass isn't good enough. For every day the Labour government fails to act, more children fall into poverty - with damaging long-term consequences for their life chances. Indeed, the Resolution Foundation estimates a further 63,000 children will be hit by the Labour government's two child benefit cap by April.

Elsewhere, Robert Kilgour, the Chairman of Renaissance Care, which operates 18 care homes across Scotland and employs almost 1400 people, warned the rise on National Insurance (NI) contributions from employers could see care homes close. Specifically, Mr Kilgour criticised the threshold at which employers must pay NI on each employee's salary being reduced from £9,100 per year to £5,000 per year.

He told The Scotsman: “It's the NHS first, and social care a poor second, if not forgotten about completely.

“It’s a real killer blow to the social care sector. I know from my colleagues who have care homes both in Scotland and England, care homes are going to close because of this.

“At a time when post-Covid, most care home companies used up a lot of their reserves, and post-Covid it’s a lower margin business.

“The 13.8 per cent on National Insurance, that’s a problem, but the big killer is the reduction in the starting point from £9100 down to £5000. From April next year, we’ll go from paying zero employers National Insurance, straight to 15 per cent.

“This government has a public sector good, private sector bad attitude. Although my care home company is private, 70 pe rcent of our residents are local authority, I.E Government funded residents. We are a private company providing a public service.

“My view is the Government's much vaunted relationship with business is as dead as the parrot in the Monty Python sketch.”