UK facing 'austerity by stealth' warns senior economist

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Economists are warning soaring inflation leaves public services facing another dose of austerity. (PA)

A senior economist has warned the UK is facing "austerity by stealth" as soaring inflation eats into public sector finances.

Budgets for government departments were set in Rishi Sunak's autumn budget last year, when inflation was predicted to peak at around 4%.

However, with inflation now expected to hit 11% this year, the money promised to services such as schools and the NHS is not going as far.

Jonathan Portes, professor of economics at University College London, said this leaves the UK's public services facing austerity by the back door.

“Those planned real terms increases in NHS spending have already been largely swallowed up by inflation," said Portes.

Read more: UK living standards fall at record rate as inflation soars

"And, worse, it means that there will actually be real cuts for education - and even more so for other public services.”

The policy of austerity was introduced in 2010 during the Conservative-Liberal Democrat coalition following the financial crisis, with the government arguing reducing spending was needed to tackle the public spending deficit.

In addition, departments are having to fund higher than expected pay rises from existing budgets.

According to the Institute for Fiscal studies, department budgets were set with the expectation of public sector pay rises of around 2-3%, whereas public sector workers have been offered pay rises averaging 5%.

UK inflation is at its highest level for decades. (ONS)

Rising energy bills are putting particular pressure on certain departmental budgets - with Portes warning fields like education will face higher energy bills to heat classrooms.

He criticised Tory leadership hopefuls Sunak and Liz Truss, claiming they were not spending enough time on these challenges.

"The Tories are engaging in this arms race over tax cuts," he said.

"But that is not actually the main issue. The main issue is that public services are being cut. And the government is literally doing nothing about it.”

During the leadership contest, Truss has said she does not plan to go down the avenue of restricting public spending.

Read more: Inflation: A quarter of UK firms expecting to raise prices

"I’m certainly not talking about public spending cuts, what I’m talking about is raising growth," said Truss earlier this month.

“I want people to be able to keep hold of their own money - but we’ll also have more money to spend on our public services over the long term.”

Sunak has failed to address the topic head on and has made no commitments on public spending levels.

There is concern within the Conservative party about the lack of focus on public services, with Tory MP Neil O'Brien saying candidates need to face up to the crisis facing the public sector.

LONDON, ENGLAND - JULY 17: (ONE MONTH FREE EDITORIAL USE; NO ARCHIVING) In this handout image provided by ITV, Conservative leadership candidate Rishi Sunak and Liz Truss during Britain's Next Prime Minister: The ITV Debate at Riverside Studios on July 17, 2022 in London, England. At 7pm on Sunday 17th July Live on ITV, Julie Etchingham hosts an hour-long debate in London with the five Conservative Party leadership contenders, vying to become Britains Prime Minister. All five candidates have agreed to take part and over the course of the 60-minute programme, they will debate with each other in response to questions put by the host. Taking place on the eve of the next round of voting, Rishi Sunak, Penny Mordaunt, Liz Truss, Tom Tugendhat, and Kemi Badenoch will debate the issues dominating the campaign. Each candidate will have the opportunity to make a closing statement. ITV is the UKs biggest commercial broadcaster and the programme will give the audience the opportunity to get to know more about the candidates and help them decide who has the qualities to be our new Prime Minister. Britains Next Prime Minister: The ITV Debate will also be streamed live on ITV Hub, as well as through, ITV News YouTube channel, facebook and on Twitter. (Photo by Jonathan Hordle / ITV via Getty Images)
Jonathan Portes criticised Rishi Sunak and Liz Truss claiming they were not spending enough time on the crisis in public services. (ITV/Getty Images)

"I support value for money and smaller government," he wrote in ConservativeHome on Monday.

"But we must be realistic about the fiscal pressures that the new leader will face.

"If we don’t tackle the cost-of-living crisis, or aren’t seen to have a clear plan to fix problems in the public services, there’s no way we’ll win the next election.

"Unfortunately, meeting these challenges will cost money."

It comes after the Institute for Fiscal Studies (IFS) issued a warning on Thursday that soaring inflation is leaving public services on the path towards austerity.

Read more: How does inflation in the UK compare to the EU?

"As things stand, unexpectedly high inflation is already set to lead to another dose of austerity for public services," it said.

The IFS added: "Whoever is in office in the autumn will have to make a choice between topping up spending plans to shore up public services, or requiring any additional costs to be met from within existing budgets.

"The former would eat into the fiscal headroom available for tax cuts; the latter would mean a deterioration in the quality of public service provision."

Watch: Truss responds to claims she would cause inflation to spiral