UK inflation leaves departments needing £44b cash boost

UK government departments require a £44 billion (S$73 billion) cash boost if they are to fully offset the impact of soaring prices, according to the Institute for Fiscal Studies (IFS).

In an analysis published on Wednesday (Aug 10), the think tank said rampant inflation is expected to wipe out more than 40 per cent of the planned real-terms increase in funding for public services over the next 3 years.

The findings show the growing strain on departmental budgets heading into a difficult winter. Schools, hospitals and other services will need to find efficiency savings unless Chancellor of the Exchequer Nadhim Zahawi increases their funding.

"Higher inflation makes the government's plans for public service spending less generous than they were originally intended to be," says Ben Zaranko, a senior research economist at the IFS. "Fully compensating departments and returning to the real-terms growth path set out last autumn could require at least £8 billion of additional spending this year, and an extra £18 billion in each of the next 2 years."

The IFS estimated that funding is now set to grow by just 1.9 per cent per annum in real terms for the next 3 years, rather than the 3.3 per cent originally planned. That's because budgets are fixed in cash terms. Spending on education and home affairs is set to barely increase, and the Ministry of Defence will be 8 per cent worse off by the middle of the decade.

Services will face "acute challenges" if ministers are also asked to fund the cost of living pledges being made by the 2 candidates vying to replace Boris Johnson as prime minister. Foreign Secretary Liz Truss, the front runner, is promising around £40 billion of immediate tax cuts and former Chancellor Rishi Sunak has said he'd deliver further direct support to households.

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"We've heard a great deal about the Conservative leadership candidates' plans for tax cuts," Zaranko said. "Given the inflation-induced squeeze on departments, and given the clear signs of strain within the NHS in particular, it might make sense for Mr Sunak and Ms Truss to also outline their plans and vision for public spending and public services." BLOOMBERG