Budget dilemmas facing the Chancellor

Nuffield-funded research could help inform some of the big decisions

All eyes will be on the Chancellor The Rt Hon Rachel Reeves when she delivers her first budget on October 30th. It will also be the first Labour budget since Alistair Darling in March 2010, and the first ever budget in the UK by a female Chancellor.

The government is facing a wide set of challenges and there is plenty of guesswork about what measures she will set out.

Investment

There is plenty of research evidence to set the scene and provide context for this budget. Ending Stagnation, the final report from the Economy 2030 Inquiry, led by the Resolution Foundation , was published at the end of 2023.

Examples of low public sector investment highlighted by Economy 2030 include that UK hospitals have fewer beds than all but one OECD advanced economy, and that UK workers spend more time commuting than those in all but two. The inquiry also said that not only is public investment too low, it is too volatile, which prevents forward planning, raises costs and leads to other challenges. To tackle this, it calls for reform of fiscal rules in favour of sustained investment.

Britain needs to become a normal investor – public investment of 3 per cent of GDP would step us up to the OECD average. Sustaining higher investment requires rewiring our fiscal framework to lean against rather than reinforce short-termism, including having fiscal rules distinguishing between current and investment spending.

Place

The Economy 2030 Inquiry also highlighted that England’s biggest cities outside London "all deeply scarred by deindustrialisation" have productivity levels below the national average, indicating a failure to successfully transition to a services-based economy.

The report spotlights low productivity issues with the UK’s ‘twin second cities’.

The productivity of many of our largest cities lags behind the UK average, bucking the global trend for bigger urban areas to be more productive. The country as a whole is poorer as a result. At the heart of this problem are Greater Manchester and Birmingham. With populations of around 2.8 million each, both easily rank among the biggest 30 cities in Europe. Yet Birmingham is 14 per cent less productive than the UK overall, and has an employment rate 5 per cent below the national average, while even Greater Manchester, widely regarded as an economic success story, has productivity 12 per cent below the UK average.

These cities are too big to fail. Each requires a substantial increase in business capital stock, over 160,000 additional high-skilled workers, expanded city centres, and billions in central government investment to enhance transport connectivity - issues that their Directly Elected Mayors are undoubtedly pressing the Chancellor to address.

Net zero

Another predicament is net zero. Low-income households are most exposed to the costs involved in making our homes more energy efficient. To meet the country’s net zero commitments, substantial investment in low-carbon infrastructure is required upfront before we see the benefits of reduced operating costs. In practice this means making our homes more energy efficient, but there is a risk of outright failure due to a 90% fall in insulation installations since 2013.

As Ending Stagnation points out:

Over the decade to 2032, the ‘home front’ of net zero will require a capital spend of ￡39 billion on efficiency measures (insulating walls and roofs) and ￡37 billion on clean heat, with the required investment accelerating over the coming years to peak at ￡14 billion in 2028.

To remain on track, one challenge facing policymakers is to ensure the enormous costs of fixing leaky homes and installing heat pumps are fairly borne.

Backing this up is research from the Institute for Community Studies , a research centre within The Young Foundation , in their #NuffieldFunded project Understanding household and community participation in the UK’s transition to a greener future.

Their final report identifies where there could be unequal impacts or risks of low-income families being left behind (running old technologies and inefficient energy systems, unable to switch to low carbon diets, work, shopping and leisure options), and the barriers to opportunities for households taking part in a fair transition to net zero. Ongoing work is exploring how this differs across the country.

As the country aims to reach its decarbonisation goals, what support will there be, if any, to help economically disadvantaged households shift to low carbon living?

Public services

A new grant with the Institute for Government is funding a Public Services Performance Tracker which provides ongoing analysis on how our public services are running.

The first report from July 2024, Fixing public services: Priorities for the new Labour government, sets out the most pressing problems in health and social care, local government, criminal justice and schools.

Among its findings it shows that if Labour sticks to the public spending plans set out in its manifesto:

• Unprotected services - including police, criminal courts, prisons, probation, adult and children’s social care – will face average annual real-terms funding cuts of 2.4% between 2025/26 and 2028/29.
• Most public services are likely to be performing worse at the 2028/29 election than in 2019

Immediate action is needed in some areas to prevent the full-scale collapse of some public services.?Will the Chancellor do enough to avert this potential crisis?

The NHS and social care

Focusing on social care, our recent grant, Evidencing the outsourcing of social care provision in England, led by Anders Bach-Mortensen at the Department of Social Policy and Intervention, University of Oxford , lays bare how outsourcing residential services like care homes and children’s homes to private providers, especially for-profit companies, has increased substantially over the last 20 years.

Despite dominating adult and child social care provision, for-profit provision has consistently failed to outperform public and third-sector, according to inspection ratings from regulators.

For-profit adult care homes also appear increasingly focused on self-funded residents in affluent areas, while in children’s care, for-profit children’s homes concentrate in disadvantaged areas with lower property prices, exacerbating issues such as children being placed miles away from home.

The findings attracted media coverage, with The Guardian UK describing the revelations as a ‘wake-up call’, and urging a rethink of the social care system. Successive governments have ducked tackling this issue. Will Rachel Reeves grasp the nettle?

The Green Budget, published by the Institute For Fiscal Studies in partnership with 花旗 , and funded by us, highlights issues on the NHS workforce and rising demand.

The NHS ‘Long Term Workforce Plan’ also aims to increase the number of staff from 1.75 million in 2023 to between 2.3 and 2.4 million by 2036–37, which implies that NHS pay may have to rise faster than that in the wider economy to ensure NHS careers are sufficiently attractive.

Demand for care services among working-age adults is growing quickly: the number of new requests for support from individuals aged 18–64 grew by 18% between 2014–15 and 2022–23 (more than three times faster than population growth for that age group), alongside sharp increases in disability benefit claims...... to meet demand pressures (particularly from an ageing population) and rising costs, the Office for Budget Responsibility projects that UK-wide public spending on adult social care would need to increase by 3.1% per year in real terms over the next decade.

Pre-election we funded the Nuffield Trust to look ahead and consider the key issues facing health and care services, and recommendations for reform. One key finding is that buildings and equipment in the NHS are in a poor state, which is limiting what it can offer patients.

Not enough of the budget has been dedicated to long-term investment over many years. Funding has been repeatedly raided to plug day-to-day deficits. Available data suggests that the UK has unusually few diagnostic scanners compared to other developed countries. The budget raids must stop, and England should spend as much on health care capital as comparable countries do.

Labour made a number of manifesto promises on the NHS, including 40,000 extra appointments every week to clear the waiting list backlog. Read more insights from the Nuffield Trust on where else the government should prioritise health spending.

For a comprehensive Budget pre-read do check out the Green Budget. It outlines the difficult balancing act the government faces to improve public services while also limiting the tax burden and managing the national debt.??

Circling back to the beginning, Ending Stagnation sets out its 10 key steps for the government, including two that focus on fairer taxation and the need for higher taxes to reverse under-investment.

Better, not just higher, taxes: A rising tax burden should not just fall on earnings, but should be shouldered by other sources of income and wealth. Wealth has risen from three to over seven times national income since the 1980s.

Resilient public and private finances: Higher growth and higher taxes are needed to raise investment, rescue public services, and repair public finances. Higher investment should be funded by higher savings at home, not borrowing from abroad.

On Budget Day we'll find out exactly how Rachel Reeves attempts to square her own circle of raising money, while still supporting investment and growth.

From our Welfare grants team Mark Franks Alex Beer and Anvar Sarygulov .