Most public services will be in a weaker financial position next year than they were 15 years earlier, despite the Budget providing the biggest day-to-day spending increases in two decades, a think tank has found.
Spending is set to increase faster than demand for every public service bar police until 2025-26, the Institute for Government’s latest report finds. Rachel Reeves’s first budget set out real-terms day-to-day departmental spending increases of 3.5% this year and 4.3% next year – which the IfG says is more generous than any year under Labour prime ministers Tony Blair or Gordon Brown except 2002.
In doing so, the chancellor diverted from spending plans set out by the previous Conservative government that the IfG says were “undeliverable while maintaining public service performance at their existing level, let alone delivering the improvements the Labour manifesto promised”.
The previous Conservative government “left public services in a precarious state”, the report says, pointing to “stubbornly high” NHS waiting lists, councils on the verge of bankruptcy, criminal courts backlogs at record levels and prisons overcrowding.
“The spending plans inherited by Labour would likely have left most services performing worse at the next election in 2028-29 than they were at the 2019 election – and substantially worse than in 2010,” it says.
But despite increases to both day-to-day and capital budgets, the report says it is “unlikely” that public services will see a notable improvement in performance.
“Given the poor state of many services, growing demand and the cost of meeting higher wage bills (including hikes to National Insurance contributions and the national living wage), this Budget was never going to return public services to full health,” the report says.
The picture has been further complicated by the election of Donald Trump as president of the United States, the report warns. This is because – with the support of a Republican-controlled congress – it is likely to increase pressure on the UK government to substantially raise defence spending, and because Trump's plans to implement trade tariffs could cut UK GDP growth substantially and reduce the government’s tax receipts.
But it says the “largely deliverable spending plans should start to address the most serious wounds”, in particular by providing extra funding for prisons and schools’ special educational needs provision.
Service quality and access “should not decline substantially”, it says – with the possible exception of criminal courts, where case backlogs are likely to grow further.
Capital spending rise welcome
The report welcomes the “meaningful boost” to departments’ capital budgets – “another area of weakness long identified by the Institute for Government” – set out by the chancellor.
It says the increase in capital spending for 2025-26 – which outstrips the rise in day-to-day spending – “will start to address decades of underinvestment in key public services like the NHS, schools and prisons”. The cash will deliver new buildings and equipment, as well as improving the maintenance of existing assets.
However, the report adds, "we will need to wait until the government’s 10-year infrastructure strategy and the multi-year spending review before we learn how transformative a new programme of investment might be".
Similarly, the report says that while the Department of Health and Social Care received a significant capital boost at the Budget, the “true test of the government’s commitment to NHS reform” will come at the Spending Review.
The government’s decision to provide DHSC with a capital budget of £13.6bn in 2025-26 – a real-terms increase of 12.8% from 2024-25 – is “arguably a more meaningful step towards improving performance than the large increase in day-to-day spending”, the report argues.
This is because underinvestment in capital is contributing heavily to a productivity crisis and is “at the heart of many of the NHS’s most damning statistics”, it says, including a chronic lack of beds; its low number of CT scanners; slow and outdated IT hardware; and a maintenance backlog that grew by 114.1% in real terms between 2015-16 and 2023-24.
To use the money effectively, the report argues, the government must take a number of steps including setting out priorities and outcomes other than hospital output metrics; reforming adult social care; and driving a shift towards prevention that looks beyond the NHS and considers the wider determinants of health.
Future cuts a concern
The report also notes that spending increases allocated in the Budget are heavily frontloaded. The Institute for Fiscal Studies has warned that after the first two years of higher increases, the 1.3% rise in resource spending in each of the following three years will "almost certainly mean real-terms cuts for some departments".
Some unprotected departments could be facing real-terms funding cuts of 1.4% in the years to 2028-29, the IFS said, with a £9bn top-up needed to avoid the cuts.
These cuts will make it difficult for some services – local government and the criminal justice system in particular – to improve before the next election, today's IfG report warns.
This frontloading adds to pressure on the Spending Review to get reforms right in areas such as mission-led government and creating more local and preventative services, the report adds.
The government has taken some necessary first steps towards restoring public services, but has "left itself much to do in the upcoming Spending Review, particularly in the context of an uncertain period following the election of Donald Trump as US president", the report concludes.
Nick Davies, programme director at the Institute for Government and one of the report’s authors, said: “The outgoing Conservative government left public services in an appalling state and returning them to 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.”