Economic challenge for public services

Spending review

The year kicked off with an audit of public spending, revealing £22bn of in-year pressures. This audit underscored the need for substantial adjustments to departmental budgets, which have not been systematically reviewed since 2021. It also highlighted the financial burden of compensation payments for victims of the Post Office Horizon IT and infected blood scandals, averaging £2.3bn annually over the forecast period.

In response to these pressures, the Conservative government’s spring Budget in March set out plans to reduce day-to-day departmental spending from 16.7% of GDP in 2023/24 to 16% by 2028/29. The Budget statement, however, noted that public service performance had reached historic lows, undermining public service performance and economic growth.

Adjusting fiscal strategies

As the year progressed, the Office for Budget Responsibility (OBR) reassessed economic forecasts and fiscal strategies. Its mid-year report indicated that while inflation was beginning to stabilise, the economic recovery was slower than anticipated, necessitating a revision of fiscal policies.

Public sector net investment became a focal point, with over £100bn allocated for areas including transport, housing, and research and development over the next five years. This investment aimed to enhance long-term economic growth, with the OBR forecasting a GDP growth increase to 2% in 2025.

The autumn Budget marked a significant shift in fiscal strategy, with a 2% annual real-term increase announced in departmental spending from 2023/24 to 2029/30. Under the spending plans set out, departments such as education, justice and health and social care saw real-term increases in spending over phase 1 of the Spending Review (2024/25 and 2025/26). This move was designed to address immediate public service needs while supporting economic stability.

The key Budget measures affecting finance professionals in the public sector are:

• Public sector investment. The government has committed to boosting capital investment by over £100bn over the next five years. This includes significant allocations for transport infrastructure (improving connectivity, investing in road and rail networks, and initiatives to promote sustainable transport solutions), housing projects, and research and development initiatives. The aim is to stimulate economic growth and improve public service delivery.
• Health and social care. The NHS has received a substantial boost in funding, with a focus on reducing waiting lists and increasing elective appointments resulting from the backlog caused by the pandemic. Additionally, reforms to health and disability benefits were announced, with the goal of ensuring fiscal sustainability and supporting individuals in remaining or starting employment.
• Education. Significant investments aim to improve infrastructure and resources for schools. The government says it recognises the need to address the long-term impacts of the pandemic on education and is committed to supporting schools in delivering high-quality education.

See details of other Budget measures in AB.

Cautiously optimistic

The OBR’s economic and fiscal outlook provided a cautiously optimistic view of the UK’s economic prospects. It indicated that GDP growth would increase to 2% in 2025, before moderating to 1.6% by 2029. Public sector net investment was expected to average 2.6% of GDP over the forecast period.

Overall, 2024 was a year of significant fiscal adjustments and strategic investments aimed at stabilising the UK’s public finances and supporting economic growth. The year highlighted the importance of adaptability in fiscal policy, with a renewed focus on maintaining economic stability, supporting public services and fostering sustainable growth. Time will tell if the new strategy will pay off for beleaguered public services.