Gloomy deficit and growth forecasts as health secretary Jeremy Hunt rebuked over spending claims
George Osborne is facing politically damaging charges that he is reducing NHS spending in England, and failing to cut the deficit this year, the opposite of the Conservatives’ central pledge of the 2010 election campaign.
Ahead of Wednesday’s autumn statement, in what is likely to be a day of bad news on growth, borrowing, debt, taxes and broken fiscal rules – and with the chancellor acknowledging there are “no miracle cures” to the country’s economic strife – the government faced the additional embarrassment of its official statistics watchdog telling the health secretary, Jeremy Hunt, he was wrong to claim that NHS spending was rising.
Ministers have repeatedly said the health budget was rising in real terms.
But the chair of the UK statistics authority Andrew Dilnot, following a complaint by the shadow health secretary, Andy Burnham, said he “concludes that expenditure on the NHS in real terms was lower in 2011-12 than it was in 2009-10”.
He has asked Hunt to “clarify” statements on the Conservative website claiming “we have increased the NHS budget in real terms in each of the last two years”. Hunt himself told MPs on 23 October that “real-terms spending on the NHS has increased across the country”.
The scale of the reduction in NHS spending is very small, but taken alongside the expected Office for Budget Responsibility report showing borrowing rising, it does mean Cameron is not meeting his promise at the start of 2010 to cut the deficit, and not the NHS.
The chancellor was expected to say on Wednesday: “In this autumn statement, we show that this coalition government is confronting the country’s problems, instead of ducking them. The public know that there are no miracle cures. Just the hard work of dealing with our deficit and ensuring Britain wins the global race.”
A Department of Health spokesman challenged Dilnot’s conclusion, saying: “The 2010-11 year should not be used as a baseline for NHS spending because the budget and spending plans were set in place by the previous government. For the first year of this government’s spending review, as Andrew Dilnot acknowledges, NHS spending increased in real terms compared to the previous year by 0.1%.”
The OBR will on Wednesday reduce its 2012 forecast made in March from 0.8% growth to about zero and for 2013 from 2% to about 1%. The target to reduce public debt as a share of national income by 2015-16 will also be missed. Osborne may also be forced to concede the structural deficit will not be eradicated for another five years, pushing the austerity to near the end of the decade.
In an attempt to give the economy a short-term boost ahead of the 2015 election, Osborne announced on Tuesday he was releasing £5bn for capital projects, mainly funded by cutting Whitehall departmental spending by 1% in 2013-14 and 2% the following year.
Health, schools and overseas aid will be exempted from the cuts, as will local government in the first of the two years. The Ministry of Defence will be allowed to roll over an underspend this year to next year.
The capital spending will include £1bn for schools to find 50,000 extra school places, including new free schools, academies and places in existing well run schools. London councils say the money is insufficient to meet the shortfall in places in London alone.
The rest of the capital spending will go on transport, skills, including further education and science. Extra help will be provided to infrastructure projects.
The Treasury says the extra capital spending will mean that capital spending on average will be higher in this parliament than in the previous three parliaments from 1997 to 2010.
A similar £5bn switch was announced in last year’s autumn statement. But research by the Guardian shows that more than half of the new capital investment announced in that autumn statement has not yet been spent on buying goods and services or paying wages, while projects have taken months to be ready and to process the money, awaiting planning permission or other hold-ups.
Most economists believe the continuing deterioration in the public finances will force Osborne to abandon his hopes of meeting his self-imposed rule to get public debt falling as a share of national income by 2015-16.
The Treasury believes the markets are already braced for the announcement, and there will be no damage to Britain’s credit rating.
Osborne will aim his statement at Britain’s “strivers” with a freeze in fuel duty aimed at household budgets while welfare benefits will be squeezed, but not frozen. The chancellor has already said the rich will be asked to pay more, including an expected cut in tax relief on pension contributions for high earners.
The extra £5bn over the next two years on capital spending will have “a minor, almost negligible” impact on overall economic growth, the Ernst and Young Item Club said.
The club, which said earlier this week that an extra £14bn on capital spending over the same period would raise economic growth by 0.5% of GDP a year, said it would be difficult to estimate the impact of £5bn over the same period.
Nida Ali, economic adviser to the Item Club, said: “Although it is a step in the right direction it is likely to have a minor, almost negligible, impact on the growth rate. It is not likely to be very visible.”
Ali added that the impact of extra capital spending is “likely to be even more negligible” because the changes will be fiscally neutral after the chancellor announced that the money would come from underspends in current budgets.
“We think the £5bn on capital spending is a step in the right direction. But we feel this is still not enough to have a big impact on growth because he has tightened elsewhere to be able to find this £5bn.” Gemma Tetlow, of the Institute for Fiscal Studies, said the £5bn would stimulate economic growth, though this would be within the margin of error of GDP forecasts. Tetlow said the extra capital spending would stimulate growth by less than 0.2% of GDP a year using the OBR’s estimate that it provides a fiscal mutiplier of one. GDP stands at £1.5tn.
Osborne also faced the embarrassing news that his flagship plan for workers to be given company shares in return for abandoning their employment rights, to be confirmed on Wednesday, has already been rebuffed by business leaders. The business department confirmed that fewer than five organisations out of 209 respondents “had welcomed the scheme and said they would take it up”. Osborne had put the proposal at the heart of his speech to the Tory conference in October.