Austerity postponed: The impact of Rachel Reeves' budget on public services

New Institute for Government analysis, funded by the Nuffield Foundation, reveals that Rachel Reeves’ budget will see spending increase faster than demand for every public service bar police until 2025/6 – with planned increases in day-to-day spending the largest in 20 years and more generous than any of Blair and Brown’s spending reviews except 2002.

But Austerity postponed? The impact of Labour’s first budget on public services, published today, finds that most services will be in a weaker financial position in 2025/26 than they were 15 years earlier, and warns that a notable improvement in performance that year is unlikely.

The new IfG report is a cross-service analysis of the budget’s impact on public services and a detailed look at four key areas: the NHS, local government, schools and the criminal justice system.

Given the poor state of many services, growing demand and the cost of meeting higher wage bills, the new IfG report argues that this budget was never going to return public services to full health but that the largely deliverable spending plans it set out should start to address the most serious wounds, such as the crises in prisons and SEND.

For 2024/25 and 2025/26, for which the budget set out departmental spending plans, the report also finds:

• Day-to-day departmental spending will increase by 3.5% and 4.3% in real terms in 2024/25 and 2025/26 respectively.
• Councils and several departments, including the MoJ, DCMS, the MHCLG communities and DWP, will still have budgets in 2025/26 that are lower (after taking inflation into account) than they were in 2010/11.
• This is the largest average increase in planned day-to-day spending in 20 years, with planned increases in day-to-day spending between 2023/24 and 2025/26 now more generous than any of Blair and Brown’s spending reviews except 2002.
• Capital spending is growing more quickly than day-to-day spending – a change in approach which should improve productivity over the long-term.
• Deep-seated issues in services, growing demand, and the effects of policies such as the rise in employer NICs and the national living wage, means it is still unlikely that there will be a notable improvement in performance in 2025/26.
• Service quality and access should also not decline substantially, with the possible exception of criminal courts where case backlogs are likely to grow further.

The report finds that the government’s chances of improving public services beyond 2025/26 depend on the upcoming spending review. 

It warns that doing so will be even more challenging following the re-election of Donald Trump, whose tariffs and foreign policy could hurt growth and reignite calls for higher defence spending, reducing funding available for public services. It finds:

• Spending is heavily frontloaded. Overall spending will continue to increase beyond 2025/26, but more slowly: by 1.4% per year on average in real terms. This is only slightly higher than the spending increases planned for those years under the previous government’s plans, albeit with a much higher baseline from 2025/26
• Government commitments to health, education, defence, aid and childcare implies that unprotected spending outside these areas will fall in real terms by 1.4% per year.
• If the government sticks to these plans, it is only in the NHS where funding would exceed demand. The biggest disparity would be in criminal courts, police and prisons. Here, even maintaining current performance levels would require big improvements in productivity, measures to reduce demand, or a more generous spending settlement.
• There is a lot of potential in the government’s plan to take a mission-led approach to that spending review and in its nascent reform agenda of creating more local and preventative services, but that it has a lot of work to make these plans a reality
   

Nick Davies, Programme Director at the Institute for Government, said:

“The outgoing Conservative government left public services in an appalling state and returning them a decent standard will take at least this parliament. The budget should stabilise most services in the short-term and made the first tentative steps on the long road to recovery. Much more will be needed in the spending review from Labour’s reform plans if they are to deliver meaningful improvements by the next election.”