Sunak must spend extra £10bn a year on public services because of Covid – OBR

Chancellor faces unfunded spending commitments on health, education and transport, says watchdog

Rishi Sunak will need to spend an additional £10bn a year for the next three years on public services to deal with the continuing fallout from the Covid-19 pandemic, the Treasury’s tax and spending watchdog has said.

The Office for Budget Responsibility (OBR) said the extra spending was currently unfunded, and would be driven by commitments across three vital government departments: health, education and transport.

It comes as Boris Johnson’s government warns the public that Britain must “learn to live” with Covid as risks to public health remain and the prospect of another difficult winter for the health service looms despite swift progress with the Covid vaccination programme.

In its biannual fiscal risks report, the OBR said the chancellor faced significant headwinds, with the pandemic increasingly likely to leave a legacy of heightened funding pressures for public services after 2021.

Projected government spending – graph

It said pressure on health budgets could be about £7bn a year above current spending plans, due to the need to pay for a continuing test-and-trace programme, revaccinations and the health impact of the pandemic.

The funds would also be needed to deal with potential future outbreaks of the disease, as well as handling the growing backlog of routine treatmentsput on hold by the crisis.

Other ongoing pressures the government has not budgeted for include £1.25bn of catchup funding for education, as well as £2bn a year to fill holes in fare revenues for the national railway network and Transport for London.

The pressures on public spending and the need for the chancellor to allocate extra cash come after Sunak made no provisions in the March budget for virus-related spending beyond the current financial year. At the time, leading economists said the chancellor’s budget did not add up and left significant questions about how Britain would respond to ongoing spending pressures.

Public sector net debt – graph

Firing a renewed warning shot before the chancellor’s spending review later this year, the OBR said Sunak would need to decide whether to increase total government spending to handle the pressures created by Covid. This would require the chancellor to either raise taxes, increase public borrowing or impose spending cuts elsewhere.

Setting out the challenges for Sunak, the OBR said the chancellor faced a delicate balance to mange a triple threat to the public finances posed by the pandemic, rising levels of government debt, and climate change.

According to the report, early action to lower carbon emissions would halve the cost to UK public finances from the transition to net-zero, compared to a scenario whereby the government would delay the investments in green projects and taxes on carbon emissions required.

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While there would be costs to the public finances from going green, the watchdog warned inaction was far costlier still because Britain would suffer from “progressively more frequent and more costly shocks” linked to extreme weather events and damage in hotter countries around the world.

The OBR urged swift action to increase spending and raise taxes to tackle carbon emissions, but it said the chancellor also needed to be wary of the dangers to the public finances from higher levels of national debt.

It said the UK’s national debt of about £2tn – equivalent to about 100% of GDP – had grown steadily more susceptible to risks from higher inflation and rising central bank interest rates.

The cost to the government to service the debt pile if interest rates rose by just one percentage point was now six times greater than before the 2008 financial crisis as a result, and almost twice as much as before Covid-19 struck, it said.

The intervention comes amid fears that central banks around the world could be forced to raise interest rates to control a burst of inflation, against a backdrop of rising energy prices and bottlenecks in global supply chains as pandemic restrictions are relaxed across advanced economies.

However, the Bank of England believes a recent sharp increase in inflation should prove temporary, with the economy forecast to return to a historically sluggish rate of growth after the pandemic.

Sunak said the risks in the OBR report “underline the importance of returning our public finances to a more sustainable path over the medium term, which is why we made difficult choices at the last budget and why this government is committed to fiscal responsibility”.

He added: “The OBR has confirmed that the ‘unprecedented’ support the government has provided through the pandemic has helped to keep companies solvent and people in jobs. We will continue to invest in our public services and support those who need it as the economy recovers – including through our plan for jobs.”


Richard Partington Economics Correspondent

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