Neil O’Brien is is MP for Harborough and former Minister for Levelling Up, the Union and the Constitution.
“Black man gets worst job in America”, ran the Onion headline when Barack Obama was elected.
Our new prime minister may feel similar. Consider their in-tray: war in Ukraine; cost of living crisis; another leap in energy bills this autumn; Russian threats to turn off the gas entirely; a winter of strikes; high inflation; NHS waiting lists rising…
…immediate choices about legislation currently in Parliament, like Online Harms, the Schools Bill. and the planning bits of the Levelling Up Bill…
…then there’s the Northern Ireland protocol, illegal immigration, small boats, and whether to take on the European Convention on Human Rights, which now makes it near-impossible to deport rejected asylum claimants.
In this column, in coming weeks, I’ll explore the choices facing our new leader.
Let’s start with two unavoidable domestic issues: the cost of living and public services.
The coming slowdown or recession in Europe will likely more than obliterate any fiscal headroom inflation creates. Meanwhile the cost of living crisis and public service challenges will both put huge pressures on the public finances.
The cost-of-living crunch
Household energy bills were £1,250 a year pre-crisis. Ofgem says the energy cap could rise another 40 per cent to £2,800 this October. Recent forecasts see it topping £3,000.
Petrol and diesel are up about 50 per cent, making drivers £400-600 worse off a year. The cost of food rose ten per cent over last year.
The great British chippy is endangered – half the world’s white fish comes from Russia. My local fish bar is holding down prices with smaller portions, but the mini-fish we now get are a striking illustration of shrinking real incomes.
We’re providing £37 billion of support this year through energy rebates, fuel duty cuts and support payments, and obviously we need to communicate that.
But much of the pain is yet to arrive. Mortgage rates have gone up, and will keep rising.
Many working people will not be able to pay both their bills and also their mortgage or rent. Self reliant working people who can make ends meet normally – but will go under without help this winter.
The inflation caused by the war is a one-off issue, and government has a vital role to play in spreading out the costs via the national debt. What were we saving up for, if not coping with a war in Europe?
At spending review inflation was expected to peak around four per cent. It’s now set to peak at 11 per cent staying higher for longer. Departments’ budgets are set in cash terms, so inflation means their real budgets will now be much lower than they were planned to be at spending review.
In some cases they will still be going up, but by less than we thought they ought to. In other cases planned increases will turn into decreases. It’s hard to measure accurately, and my back-of-the-envelope calculation below shows two different measures of inflation – it will probably feel somewhere between the grey and yellow bars.
Our plans also assumed pay awards between two and three per cent; but public sector workers were last week offered pay increases averaging five per cent.
But that increase is currently unfunded – departments will have to find the money for those higher pay awards from within their existing budgets.
Ben Zaranko from the Institute of Fiscal Studies says the cost of the offer we just made is £4.5bn-£7bn. For the NHS alone it could mean finding £2 billion of savings unless it is funded.
But we already have some serious challenges, which our spending plans were designed to address.
Take health. Numbers on NHS waiting lists have risen even since the end of the pandemic. There were over 3 million people waiting in 2015, but 6.6 million now.
The target ambulance response time for heart attack or stroke type calls (‘Category 2’) is 18 minutes, but the current England average is 51 minutes.
Forty-seven per cent of people say they struggle to get through to someone at their GP, up from 19 per cent in 2012. We pledged to recruit 6,000 more GPs by 2024 to fix this, but the outgoing health secretary said we’re “clearly not” on track to hit this.
GPs take up to ten years to train, so improvements before the election will require money to lure retired doctors back from the golf course, or other jobs, or to get GPs to work more hours.
Obviously, we need reform to make the NHS more efficient and prevent people needing it.
But we also need to be realistic: taming backlogs and sorting out GPs by the next election isn’t going to be any easier if substantial savings have to be made from the planned health budget. The same is true for the police, local government, and so on.
And pay pressures will likely intensify. Given wages are falling behind inflation, the Government will be pressed to go beyond five per cent. Nominal increases in the private sector are running at 7-8 per cent, further ahead of the public sector than any time in the last 20 years.
You can argue that’s private pay catching up. In 2019, the ONS said there was still a six per cent public sector wage premium, which then got bigger during Covid.
Nonetheless, unions will try catch up with the private sector and fight falling real wages.
Train drivers are striking. Royal Mail workers balloting for strikes in August. The new head of the British Medical Association says a doctors’ strike is “inevitable” by spring. The teachers union say they’ll strike unless they get an above-inflation increase.
Raising public sector pay in line with inflation would be expensive: according to Zaranko it costs around £2.3bn for each extra one per cent you put on the pay bill.
So going from five per cent now to ten per cent (to increase pay in line with inflation) would require a further £11-£12bn or so, on top of the £4.5-7bn, roughly £15-19bn in total.
The new prime minister will face an unappetising choice between even more economically damaging strikes and even higher costs to the taxpayer.
Pay is only one fiscal pressure on services. Another is capital spending. Construction inflation is much higher, with implications for the new hospitals programme, new roads and railway stations, and Levelling Up investments. Without more money, popular things which MPs are planning to put on election leaflets may disappear in a puff of inflation.
Beyond inflation, there’s plenty of other pressures on public spending too. Many conservatives would like to increase defence spending. Others want more violent criminals locked up for longer.
In further columns I’ll write more about options for reform. I support value for money and smaller government.
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