Rampant inflation is putting the NHS and other public services “under considerable, and visible, strain,” top economic experts have warned today.
Government departments and local councils are set to struggle to provide services to taxpayers due to swelling costs eating up their budgets.
Higher inflation will erode more than 40 per cent of announced funding increases for public services, according to the calculations by the Institute for Fiscal Studies (IFS).
Under plans set out by former chancellor and now Tory leadership hopeful Rishi Sunak at the spending review last autumn, government departments’ budgets were set to rise 3.3 per cent each year over the next three years, even when accounting for inflation.
But, if inflation surges to over 13 per cent, as forecast by the Bank of England last week, yearly that upgrade will drop to 1.9 per cent.
Inflation is forecast to top 13 per cent
Soaring prices have resulted in the government’s spending plans being “less generous than they were originally intended to be when set out last autumn, while public services – most notably the NHS – are under considerable, and visible, strain,” the IFS said.
Inflation boosts a country’s public finances by raising tax revenues. However, higher prices mean departments have to pay more to provide services. Their budgets do not automatically increase in response to inflation shocks.
“Choosing not to compensate departments for unexpectedly high cost pressures would be one possible response to a cocktail of global economic shocks that leave us poorer as a nation, but [that] would heighten the considerable pressures on public services heading into the winter,” Ben Zaranko, senior research economist at the IFS, said.
The economic think tank calculated the treasury needs to top up funding over £8bn this year and £18bn in each of the next two years to cover higher costs.
Failing to increase budgets “could be disastrous” for local services, James Jamieson, chairman of the Local Government Association, said.
Neither Sunak or Liz Truss, his leadership contender, have set out plans to increase departmental budgets.
Zaranko said “it might make sense” for them to do so and map out their “vision for public spending and public services”.
A Sunak campaign spokesperson told City A.M. Truss’s “plans for permanent tax cuts funded by borrowing will put fuel on the inflation fire and keep prices higher for longer”.
A Truss campaign source told City A.M.: “Liz has a bold plan for economic growth which will mean more revenue for our vital public services. Through cutting taxes and driving business investment, she will deliver for the hard working people of our country.”