Office for Budget Responsibility chair Richard Hughes has warned MPs that the figures set out in last week's Budget imply real-terms cuts by the end of the current parliament for departments without protected resource budgets.
Hughes' comments came at a session of the Treasury Select Committee this morning that was examining aspects of chancellor Rachel Reeves' Autumn Budget.
The OBR chair was quizzed about the "frontloading" of resource spending and how much scope there will be for ministers to reduce spending in the latter part of the five-year period that the Budget's broad-brush figures cover.
Hughes said Reeves had clearly added "significant resources" to the overall departmental spending envelope, with most of the influx channelled to resource spending. But he acknowledged that the figures suggested cuts in the later years of the parliament – with "challenging" choices for 2025's multi-year Spending Review.
"The issue is that they've added a lot in the first two years and not very much in the latter two years," Hughes told MPs. "Growth in current departmental spending is 4.8% [in] real [terms] this year, 3.1% next year and then it goes down to 1.3% over the remainder of the parliament, which is actually not much above the real growth rate in those resources that you saw in the previous government's plans."
Hughes said the OBR's prediction was for gross domestic product to grow between 1.5% and 1.66%, meaning that in the later years of the parliament public sector spending is projected to be slower than the growth in the wider economy.
He said that the 1.3% growth in public spending pencilled in for the later years of the decade would be problematic for the National Health Service, which has traditionally grown faster than GDP – and usually more than 3% a year. Hughes also pointed to the government's commitments to meet its NATO obligations to spend 2% of GDP on defence, rising to 2.5%, and its aspiration to return Official Development Assistance to 0.7% of gross national income.
"What does that leave for the rest?" he asked. "Well if you look over the parliament, the rest of departmental spending grows a little bit. But if you take the period of the next Spending Review, which is 2026-27 onwards, remaining government departments are actually seeing a real cut in their budgets of around 1%, before you then try and pay for defence going to 2.5% or overseas aid going up to 0.7%."
Last week independent think tank the Institute for Fiscal Studies predicted that the figures set out in the Budget could mean annual resource-budget cuts of 1.4% for some "unprotected" departments in the later years of the decade.
Select committee member Rachel Blake asked Hughes how realistic he thought the growth target of 1.3% for public spending was in later years of the parliament.
The OBR chair said it would depend on the choices that the government is prepared to make at the next Spending Review, which is due in the spring.
"There is no doubt that it sets up quite a challenging envelope for that spending review," he said. "And one where governments will have to prioritise between competing pressures on resources. It's a particular challenge when governments are not so much committing to deliver a particular service but when they're committing to deliver a level of spending.
"If you commit to increasing spending as a proportion of GDP and your overall envelope is going down. That has got a very obvious and clear price tag. It limits your scope to prioritise."
Hughes said the OBR's longer-term projections showed that just meeting the cost of demographic change with the same unit-cost growth in healthcare spending would see public spending rise to 60% of GDP over the course of the next 50 years. He added that under the modelling debt would go up to 200% or 300% of GDP over the same period.