Treasury Committee
Tuesday 3rd November 2026
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09:49
Speaker 1
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Speaker 1
Order, order! Welcome to the Treasury Select Committee on Tuesday, the 3rd of November 2026. Last week, the Chancellor of the Exchequer stood up in the House and delivered his budget to the nation, and this is the beginning of the Treasury's Committee's examination of that budget. And I'm very delighted to have in front of us a group of expert witnesses to help us define what really lies below the headlines that came out last week. And from my left to right, I'm delighted to welcome Sanjay Raja, who's the UK chief economist at Deutsche Bank and some expert on devolution, Helen Miller, of course, who needs no introduction as director of the Institute for Fiscal Studies, who's been out on the airwaves already about this budget.
So we may probe you on that. Miss Miller, the professor, Tony Travers, who is long standing at the London School of Economics and is currently interim dean of the LSE School of Public Policy, and Ruth Curtis, the chief executive of the Resolution Foundation, also no stranger to this committee. I really want to just to kick off with each of you in turn about if you could just summarize in your view, how much difference the measures announced last week by the Chancellor are likely to make to economic growth.
I'll start with you, Mr. Raja.
So we may probe you on that. Miss Miller, the professor, Tony Travers, who is long standing at the London School of Economics and is currently interim dean of the LSE School of Public Policy, and Ruth Curtis, the chief executive of the Resolution Foundation, also no stranger to this committee. I really want to just to kick off with each of you in turn about if you could just summarize in your view, how much difference the measures announced last week by the Chancellor are likely to make to economic growth.
I'll start with you, Mr. Raja.
09:50
Speaker 2
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Speaker 2
Thank you very much, Dame Meg Hiller. I'll start off by just saying a few things just on the budget itself. I think it was as expected. I think we all expected this to be a pretty dull budget, if I can use that phrase. We knew that the Chancellor had been talking up breathing space for households and businesses. So from a financial market perspective, there were. The bar was very low for this to be a big surprise. I mean, the market was expecting three things, £15 billion of headroom. I think we can round up and say that the Chancellor met that goal 5 to £10 billion of extra borrowing per annum.
That's roughly what we ended up getting. And number three, of course, from a gilt remit perspective, which was the key focus for the market going into this budget was very limited ten ish, billion pounds per annum in terms of extra supply per year. And I think there was the big surprise on that point. I'm sure we'll talk about that in a second. But in terms of the economic impacts of this budget, the OBR said it itself barely anything. Our own calculations going through the 98 policy measures. So we did have quite a lot to dive into using our own multiplier, slightly different from what the office for Budget Responsibility uses.
It tells a slightly different story, but overarching story is pretty much zero. We have some growth in the current fiscal year, but seven eight basis points. It then moves into about zero basis points for the next three fiscal years. And then by the time we get to the back end of the forecast horizon, the last two fiscal years, it starts to drag on GDP, which is very consistent with the sort of fiscal stance that most economists look at, which is the cyclically adjusted primary balance.
That's what most economists will tend to.
That's roughly what we ended up getting. And number three, of course, from a gilt remit perspective, which was the key focus for the market going into this budget was very limited ten ish, billion pounds per annum in terms of extra supply per year. And I think there was the big surprise on that point. I'm sure we'll talk about that in a second. But in terms of the economic impacts of this budget, the OBR said it itself barely anything. Our own calculations going through the 98 policy measures. So we did have quite a lot to dive into using our own multiplier, slightly different from what the office for Budget Responsibility uses.
It tells a slightly different story, but overarching story is pretty much zero. We have some growth in the current fiscal year, but seven eight basis points. It then moves into about zero basis points for the next three fiscal years. And then by the time we get to the back end of the forecast horizon, the last two fiscal years, it starts to drag on GDP, which is very consistent with the sort of fiscal stance that most economists look at, which is the cyclically adjusted primary balance.
That's what most economists will tend to.
09:52
09:52
Speaker 2
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Speaker 2
So adjusting for the output gap, the sort of ebbs and flows of the economy based on the business cycle. So that's part of that calculation. But also stripping out the the interest payments as as well. So in some ways, the cyclically adjusted primary balance effectively tells you the true stance of the fiscal underlying fiscal policy stance going through over the next five years. So it's a way to kind of strip out the sort of interest costs, which obviously has increased quite dramatically over the last five, ten years, or at least over the last five years specifically.
But ultimately, it gives you a very genuine sense of where fiscal policy is moving from a growth perspective. And that has been shrinking. So the direction of travel has been clear. Borrowing is on the way down, which is, I think, the good news from a market perspective. And that also implies a little bit more of a tightening coming through the public finances. So from a financial market perspective, that was received pretty well.
But ultimately, it gives you a very genuine sense of where fiscal policy is moving from a growth perspective. And that has been shrinking. So the direction of travel has been clear. Borrowing is on the way down, which is, I think, the good news from a market perspective. And that also implies a little bit more of a tightening coming through the public finances. So from a financial market perspective, that was received pretty well.
09:53
09:53
Speaker 3
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Speaker 3
Thank you. So holding aside the big picture, public finances stuff just on that list of 98 measures, the short answer is I think there's nothing there that's really going to move the dial on growth. I mean, the OBR said itself, it's not going to score anything. I think what I was saying we shouldn't get too hung up on just what the OBR is going to score. There could be lots of small measures that would be good to do, where the government believes they're going to be good for growth, where there's good theoretical case for them, and we should do them, even if the OBR doesn't think they're worth scoring for that bigger fiscal picture.
So I think that we shouldn't only care about things that are going to be scored. But even looking, you know, past that threshold, I don't think there's anything there that's really going to move the dial. I think the one bigger thing is around devolution, where you can make a story that might help with growth. Maybe we'll come back to that. But we certainly, you know, we don't have enough details yet to be able to say, yes, that's definitely going to be the thing that drives up growth.
So I think that we shouldn't only care about things that are going to be scored. But even looking, you know, past that threshold, I don't think there's anything there that's really going to move the dial. I think the one bigger thing is around devolution, where you can make a story that might help with growth. Maybe we'll come back to that. But we certainly, you know, we don't have enough details yet to be able to say, yes, that's definitely going to be the thing that drives up growth.
09:53
09:54
Speaker 4
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Speaker 4
Well, I'll leave my colleagues here to talk about the impact of the budget on the economy in the short term. But if I can just look at the fiscal devolution proposals, they are the beginning of a long process, which the Prime Minister has said he hopes will deliver higher economic higher levels of economic growth in all parts of the country. But of course, what we saw in the budget was just the outside, you know, the very, very beginnings of a process which will be quite complex to decentralize and devolve parts of the existing tax system to city, regional and county, regional mayors, mayoral strategic authorities.
But in the short term, whatever the impact is going to be in the longer term, it's not going to have much impact in the next year or two.
But in the short term, whatever the impact is going to be in the longer term, it's not going to have much impact in the next year or two.
09:55
09:55
Speaker 5
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Speaker 5
Yeah, I think as others have said, there isn't much in this budget that would move the kind of medium term growth rate. But if there was a very straightforward measure that the government could announce that did that, I think governments would have done already. To be fair, what is really catastrophic about these forecasts is the forecasts, particularly for household living standards, a 10th of the growth in the 2020s than we saw in the 20 tens. And I think where this budget disappoints, particularly is in not facing up to the squeeze on households and in not providing effective support as we enter a very difficult winter.
09:55
Speaker 1
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Speaker 1
Thank you. I think we'll come to that. But just on one thing, Helen, if I could just ask you, there was the timings were interesting here. The OBR was always difficult thing. The OBR has its deadline set by the budget date effectively. So it put out its forecast on the 8th of September, and it was only a few days later that the ONS reported GDP growth of 0.7% in the three months to August. Do you think that those later figures give more room for optimism than the OBR forecast reflected?
09:55
Speaker 3
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Speaker 3
I think the short answer is that no, not really. I think the uncertainty around the forecast is much more important. So the OBR themselves discuss that. They think that had they have had that more recent data, it wouldn't actually have made a big difference to their forecast. Maybe it makes a little bit of difference to in year. But if we're thinking about the forecasts over the next five years, it's what you expect to happen to growth that matters much more than what you think happened in this particular quarter. I think most economists think that actually the economy has been more resilient this year than many people expected.
But going into next year, as the effects of the war keep working through the economy, things will get worse. It's also worth saying there's always a huge amount of uncertainty around forecasts. There's also particular uncertainty at this particular moment around AI and in particular, how we are seeing some of the data coming through the AI is through investment, but that could have very different impacts on the labour market, for example, in coming years. So I think the bigger and more important thing is around the uncertainty than about how you take account of any quarterly growth figures.
But going into next year, as the effects of the war keep working through the economy, things will get worse. It's also worth saying there's always a huge amount of uncertainty around forecasts. There's also particular uncertainty at this particular moment around AI and in particular, how we are seeing some of the data coming through the AI is through investment, but that could have very different impacts on the labour market, for example, in coming years. So I think the bigger and more important thing is around the uncertainty than about how you take account of any quarterly growth figures.
09:56
09:56
Julie Minns
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Julie Minns
Thank you very much. I, I was very interested I think particularly the Resolution Foundation's comments in relation to what could have been done more and also what impact what potential impact the UK's close relationship with the UK, with the EU could have on growth. That sort of seemed to be a missing piece of the puzzle. So I was interested in if you might just talk a bit more about some of the commentary that you had around that.
09:57
Speaker 5
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Speaker 5
Yeah. So in in the short term, I think we should be clear that the government can't kind of mitigate all of the effects of the war in Iran. So the particular decline we see in household living standards in the short term is driven by those higher prices that come from higher energy prices. And in terms of data we've had since the forecast, energy prices look to be closer to the severe of the OBR forecasts already, rather than the central one. So that's why we're particularly worried about households in the short term. What the government can't do is simply compensate everyone for those.
The country is poorer as a result. What it makes choices about is how to distribute those costs. And I think giving 80% of people £100 based on the value of their property in the early 90s was not a good way to to support us through an extremely difficult winter, as you say, on medium term growth rate. When we look at all of the things the government could do, the data around the impact of leaving the EU, there's a , you know, is that we're between 4 and 8% smaller as an economy than we would be without that.
And when we look particularly at the trade data, it is our goods trade that has really suffered since since Brexit. So we've become even more concentrated as a service economy. And it's that's due to a decline in goods trade rather than a kind of acceleration of services trade. So particularly if the government wants to reindustrialize in the sense of have more goods trade, I think the relationship with Europe will be very important.
The country is poorer as a result. What it makes choices about is how to distribute those costs. And I think giving 80% of people £100 based on the value of their property in the early 90s was not a good way to to support us through an extremely difficult winter, as you say, on medium term growth rate. When we look at all of the things the government could do, the data around the impact of leaving the EU, there's a , you know, is that we're between 4 and 8% smaller as an economy than we would be without that.
And when we look particularly at the trade data, it is our goods trade that has really suffered since since Brexit. So we've become even more concentrated as a service economy. And it's that's due to a decline in goods trade rather than a kind of acceleration of services trade. So particularly if the government wants to reindustrialize in the sense of have more goods trade, I think the relationship with Europe will be very important.
09:58
Julie Minns
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Julie Minns
Can I just do a follow up? You are right to highlight that. And still almost 50% of our exports, 40% of our exports and about 50% of our imports are, are with with the EU. But did you have any sense of where, if there were to be closer ties with the EU, which is an important topic at the moment, where to support growth, there might be a greater focus.
09:59
09:59
09:59
John Glen
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John Glen
Can I just ask for balance on this subject? I mean, the EU is in a different place ten years hence from the referendum and the costs of executing those closer relationships are not known. How do you weigh that uncertainty and the obvious uncertainties in the politics of Europe against that narrative around the positivity?
10:00
10:00
10:00
10:00
10:00
Bobby Dean
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Bobby Dean
Thank you. Chair. Sorry to come straight back to you, but I wanted to focus on living standards, and you described them as catastrophic in your opening remarks. I've seen the figures that compare what the 2020s are going to look like compared to previous decades, 1.4% against the previous poor record of 14%. How much could the government have done about that in this budget?
10:01
Speaker 5
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Speaker 5
So I think the the big choice that this this government faces in 2027 have not faced it at this budget is the choice between household incomes and departmental spending. So the the total consequences of of tax and benefits have been very significant in the 2020s. So both when we look across these big picture decades, both the 20 tens and the 2020s have disappointing economic growth per person. And that drives the disappointment relative to previous decades. But in the 20 tens, you know, overall taxes and benefits added to household incomes. Whereas in the 2020s they've been a drag on household incomes.
And and that money has been spent on higher departmental spending. Overall, there isn't a big difference in the borrowing levels between the kind of end of the previous decade and what we expect by the end of the 2020s. So this is a story of higher spending for for less household income. And I think perhaps the kind of 1% extra that's gone on the NHS might be something that voters are happy with. The reason it feels so tough is that it's over two and a half percentage points of GDP of that has gone on higher debt interest spending, so that higher debt interest has meant we are much, much poorer as a country.
The choice that the government faces is the extent to which public services or households absorb that cost. And the reason we've seen, really, these grim kind of living standards forecasts through the 2020s is because they've they've chosen to ask households to bear almost all of that burden.
And and that money has been spent on higher departmental spending. Overall, there isn't a big difference in the borrowing levels between the kind of end of the previous decade and what we expect by the end of the 2020s. So this is a story of higher spending for for less household income. And I think perhaps the kind of 1% extra that's gone on the NHS might be something that voters are happy with. The reason it feels so tough is that it's over two and a half percentage points of GDP of that has gone on higher debt interest spending, so that higher debt interest has meant we are much, much poorer as a country.
The choice that the government faces is the extent to which public services or households absorb that cost. And the reason we've seen, really, these grim kind of living standards forecasts through the 2020s is because they've they've chosen to ask households to bear almost all of that burden.
10:02
10:02
Speaker 5
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Speaker 5
I think they could have done two things. One thing is, when you do have very tough average living standards, you need to think really carefully about how you're distributing those living standards and the money that you're spending. So I think the cost of living support may be relatively small, but I really do think it's important that we scrutinise it in terms of what it tells us about how effectively the government is making those choices. And then I do think, yes, as we approach a spending review in 2027 and it looks like to be an extremely difficult trade off between incomes and departmental spending, that one of the key choices next year, whether things get a little bit better or a little bit worse in the face of all that uncertainty, is where the government's priority lies between incomes and public services.
10:03
Bobby Dean
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Bobby Dean
Miss Miller, we've spoken about energy costs sort of driving a lot of the problems. There's kind of a narrative out there that maybe if the war in Iran eases, then a lot of these problems go away. What kind of difference could an improvement in the global energy crisis make to people's income standards?
10:03
Speaker 3
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Speaker 3
Yeah. So on the sort of two different issues. So one is just we got unlucky. There's a war out there in the world that we have, you know, haven't started that drives up gas prices. And that is directly affecting our electricity prices. And that's bad for us because we all need that. And we're at a point it's sort of an unfortunate timing because we're at a point where we're trying to transition away from gas, but we're not yet at the point where we are. We're still weaning ourselves off of it. So we've got this point.
We've got a plan to get off of it. We're not there yet, and therefore we're being hit by the full force of these prices. So of course, the sooner those prices came down, the better we would all be. And that would help relieve, you know, living standards. Pressures mean living standards basically are how much income you have divided by the prices you have to pay. And obviously if those prices come down, that would be better. The other thing about energy prices is that even before this, actually, we had internationally very high electricity prices. In part, that is a policy choice to take the subsidies that have been used to fund renewables generations and pop them onto the unit price of electricity.
And we think that's not the best place for them, and you should park them somewhere else. But that's really about how you move money around. You can't make them disappear. Somebody's got to pay them. It's just that by putting them on marginal prices, we are disincentivizing electricity more than we think you should, given everything else going on. So I think there's that kind of background picture about electricity prices. And the government could do something else, but one of them, one of them will be a genuinely win win. Lower prices. One would them would be a good in some ways, but you have to find somebody else to pay the cost.
We've got a plan to get off of it. We're not there yet, and therefore we're being hit by the full force of these prices. So of course, the sooner those prices came down, the better we would all be. And that would help relieve, you know, living standards. Pressures mean living standards basically are how much income you have divided by the prices you have to pay. And obviously if those prices come down, that would be better. The other thing about energy prices is that even before this, actually, we had internationally very high electricity prices. In part, that is a policy choice to take the subsidies that have been used to fund renewables generations and pop them onto the unit price of electricity.
And we think that's not the best place for them, and you should park them somewhere else. But that's really about how you move money around. You can't make them disappear. Somebody's got to pay them. It's just that by putting them on marginal prices, we are disincentivizing electricity more than we think you should, given everything else going on. So I think there's that kind of background picture about electricity prices. And the government could do something else, but one of them, one of them will be a genuinely win win. Lower prices. One would them would be a good in some ways, but you have to find somebody else to pay the cost.
10:05
Bobby Dean
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Bobby Dean
I guess what I'm trying to drive at is how how big of a part energy prices are to this really stark figure of only looking at 1.4% increase in disposable income over the course of this decade. If the war in Iran was to ease, the energy price situation, was to improve in the near term, would that make a dramatic difference to that figure, or is the government got a lot more work to do elsewhere in order to drive that up?
10:05
Speaker 3
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Speaker 3
I think the short answer it's got a lot more work to do elsewhere. So I haven't got the exact number in front of me about how much difference. The OBR have, some scenarios about how much it matters and it matters. And you would I mean, part of the reason that from the March forecast to the current, the October forecast living standards have been revised down. And that really is the effect of of this inflation, higher inflation. Worth saying, too, that even this the central forecast assumes that inflation peaks at the end of next year and then comes down again.
So even the central forecast assumes that this war does come to some kind of cease and inflation pressure backs off. So of course, worth remembering things could get worse as well as better, sadly. But even without that, I think there is an underlying like low productivity problem going on here. And actually, to pick up some of the previous conversations, the government's got kind of a couple of different challenges. One is in the short run to decide which types of people to support and how. So for a given size of the economic pie, you've got to work out which people to give it to, how to do it between direct incomes or tax cuts or public services.
And that's just a really tough trade off. What's going to make us all better off is not just accepting the size of the pie. It's doing all the things across lots of policy areas, which could be about energy prices, competition, education, tax policy reform, which I think if you doggedly did the hard yards across lots of areas, that would be what could tilt up the growth rate and make this I think maybe, frankly, it's probably too late for this decade. I think it's too late to really bend it up too much through that underlying productivity.
But certainly going for the next decade. That's the thing that would really make the next decade better than this decade.
So even the central forecast assumes that this war does come to some kind of cease and inflation pressure backs off. So of course, worth remembering things could get worse as well as better, sadly. But even without that, I think there is an underlying like low productivity problem going on here. And actually, to pick up some of the previous conversations, the government's got kind of a couple of different challenges. One is in the short run to decide which types of people to support and how. So for a given size of the economic pie, you've got to work out which people to give it to, how to do it between direct incomes or tax cuts or public services.
And that's just a really tough trade off. What's going to make us all better off is not just accepting the size of the pie. It's doing all the things across lots of policy areas, which could be about energy prices, competition, education, tax policy reform, which I think if you doggedly did the hard yards across lots of areas, that would be what could tilt up the growth rate and make this I think maybe, frankly, it's probably too late for this decade. I think it's too late to really bend it up too much through that underlying productivity.
But certainly going for the next decade. That's the thing that would really make the next decade better than this decade.
10:07
Bobby Dean
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Bobby Dean
And finally, Mr. Raja, I'm just wondering about what kind of scarring effect this kind of decade could have on people. Do you anticipate there's going to be any long, or are you already seeing the data, any long run effect on consumption or saving habits because of people being under pressure for for such a long time?
10:07
Speaker 2
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Speaker 2
I think there will absolutely be some scarring effect. But at one point, if I may just come back to the question that you asked previously in terms of what does the energy forecast ultimately mean for the public finances, if we do a very simple decomposition of the pre measures forecast, you can make a rough estimate that that cost on borrowing roughly amounts to about 8 to £10 billion, give or take. So that is basically the cost of higher inflation. A one percentage point increase in RPI across the forecast horizon adds about £10 billion to borrowing.
We all know that. But of course the real disposable income squeeze, as Helen mentioned rightly, also comes predominantly because of the energy shock. The one odd thing about this forecast, and I think Ruth mentioned it at the start, was we have two very different conditioning assumptions window, which makes the forecast a bit odd compared to what we've seen in the past. So you've got one forecast, the economy forecast that was closed, I believe, in the 19th of August, where the conditioning assumptions windows window ended. And then you've got the fiscal forecast that has five working days to mid-September.
That's when the conditioning assumption window for the fiscal forecast closed. Now, of course, there are some merits to having a little bit of clarity on the economic forecast ten weeks in advance of the budget. But what I think ultimately the OBR has ultimately gotten itself wrong. And it comes back to an earlier conversation about the growth numbers. It's underestimated GDP to some extent. Clearly, Q3, GDP will be a lot stronger than what the OBR is expecting. But on the real income squeeze, inflation next year will probably be something like 50 to 60 basis points higher than what the OBR expects next year.
So they have an 1875 price cap for Q1. Our forecasts are roughly around 2150 and rising in Q2. Now, of course, we won't have a lot of clarity in what happens in the second quarter of next year in terms of the Ofgem price cap. But for the coming quarter, the winter months of January to March, where we know energy consumption is pretty high, we're expecting something like £3,400 on an annualized basis, higher than what the OBR expected. So there will be some scarring scarring effect on inflation. The peak in CPI for us is closer to 4.25 as opposed to 3.75.
So there will be a little bit more of a real disposable income squeeze in the first quarter of next year. And ultimately, that just compounds over the cost of living shock that we've had for a good while.
We all know that. But of course the real disposable income squeeze, as Helen mentioned rightly, also comes predominantly because of the energy shock. The one odd thing about this forecast, and I think Ruth mentioned it at the start, was we have two very different conditioning assumptions window, which makes the forecast a bit odd compared to what we've seen in the past. So you've got one forecast, the economy forecast that was closed, I believe, in the 19th of August, where the conditioning assumptions windows window ended. And then you've got the fiscal forecast that has five working days to mid-September.
That's when the conditioning assumption window for the fiscal forecast closed. Now, of course, there are some merits to having a little bit of clarity on the economic forecast ten weeks in advance of the budget. But what I think ultimately the OBR has ultimately gotten itself wrong. And it comes back to an earlier conversation about the growth numbers. It's underestimated GDP to some extent. Clearly, Q3, GDP will be a lot stronger than what the OBR is expecting. But on the real income squeeze, inflation next year will probably be something like 50 to 60 basis points higher than what the OBR expects next year.
So they have an 1875 price cap for Q1. Our forecasts are roughly around 2150 and rising in Q2. Now, of course, we won't have a lot of clarity in what happens in the second quarter of next year in terms of the Ofgem price cap. But for the coming quarter, the winter months of January to March, where we know energy consumption is pretty high, we're expecting something like £3,400 on an annualized basis, higher than what the OBR expected. So there will be some scarring scarring effect on inflation. The peak in CPI for us is closer to 4.25 as opposed to 3.75.
So there will be a little bit more of a real disposable income squeeze in the first quarter of next year. And ultimately, that just compounds over the cost of living shock that we've had for a good while.
10:09
10:09
10:09
Speaker 2
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Speaker 2
In a medium term effect is where we would probably put this at. Right. And, you know, 3 or 4 years, yes, we will have some scarring effects. If you look at the OBR forecast in terms of household savings, that goes from an adjusted 5.25% to 5.5% all the way down to about zero. And so there will be some effect on savings rates, on how households smooth over their consumption patterns. So this will be interesting to see. I think the OBR is slightly more on the pessimistic side about what happens to real disposable incomes.
I think we saw this in 2022 where they forecasted a bigger squeeze. We didn't see that because energy prices fell back quite quickly. Wage growth was a little bit higher than people expected and the forecasters expected, including us. And ultimately that cushioned a little bit of that squeeze in real disposable incomes. And I think we can expect something similar over the coming years.
I think we saw this in 2022 where they forecasted a bigger squeeze. We didn't see that because energy prices fell back quite quickly. Wage growth was a little bit higher than people expected and the forecasters expected, including us. And ultimately that cushioned a little bit of that squeeze in real disposable incomes. And I think we can expect something similar over the coming years.
10:10
10:10
Julie Minns
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Julie Minns
Thank you very much. I want to ask about productivity. There's been a increasing debate about productivity in the extent to which the UK still has a productivity problem compared to other countries. The Treasury reports annualised productivity growth. Of over 1.3% of 1.3% over the past two years, compared with less than half that between 2015 and 2024. Do you think that this gives us an insight into the prospects for sustained productivity growth in the UK? And what's your assessment of what has driven the change in the last couple of years? Do you think that some of the measures that we've seen from the former chancellor, the increased public investment has has had an impact on that as well?
Go to Helen first.
Go to Helen first.
10:11
10:11
Speaker 3
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Speaker 3
Great. Thank you. So I think some of the important context here is obviously the ONS made a pretty big revision to its the way it measures people's hours worked. And as a result of that, we now think productivity per hour worked is much higher over the 20 tens than than we previously thought. So in terms of you mentioned about the international comparison, it still means that productivity has was lower post-financial crisis than pre-financial crisis. And that's bad news for us all. But we are less of an international outlier. So now we don't look quite as unusual as we we did look.
And that in some sense, helps explain why we couldn't find some of the answers to why we looked so unusual, because there in the data. Importantly, however, that was really all about hours worked. What hasn't changed is the amount of income being produced in the amount of worker. So on that broader measure of productivity of output per worker, which is really what conditions these forecasts and what drives the aggregate, that hasn't changed. That hasn't really changed. I think the important thing here is so sorry on your other question about what what's changed in the short run, my view and others might differ is I think there are good reasons to think that public investment could help drive up productivity.
Devil is always in the detail. It depends not just how much you invest, but what you actually invest it in, and I'd expect it to take some time to that actually to feed through into the economy to, you know, to give better infrastructure or more capital that allows people to be more productive. So I'd be surprised if that's a big driver of the kind of the in year improvements, but it might have an effect overall. The bigger point, I think, is the one that I mentioned earlier, the one that the OBR emphasis is just the uncertainty.
Actually, it's really hard to to know what's going to drive, how productivity is going to develop. That's always true. But I think AI is making that uncertainty even bigger than usual. So in our in our annual green budget, our look ahead of the budget, we have two model two sort of scenarios or broad brush. One was to say, look, AI might just in boost investment, give us a demand pick up in the short run, but actually not lead to higher sort of sustained productivity growth. Or it might increase productivity, make us more productive and increase growth.
And in the short run, those will look quite similar. But in the long run they could look quite different. So I think that for me, that uncertainty about productivity is as as important as any particular point estimate.
And that in some sense, helps explain why we couldn't find some of the answers to why we looked so unusual, because there in the data. Importantly, however, that was really all about hours worked. What hasn't changed is the amount of income being produced in the amount of worker. So on that broader measure of productivity of output per worker, which is really what conditions these forecasts and what drives the aggregate, that hasn't changed. That hasn't really changed. I think the important thing here is so sorry on your other question about what what's changed in the short run, my view and others might differ is I think there are good reasons to think that public investment could help drive up productivity.
Devil is always in the detail. It depends not just how much you invest, but what you actually invest it in, and I'd expect it to take some time to that actually to feed through into the economy to, you know, to give better infrastructure or more capital that allows people to be more productive. So I'd be surprised if that's a big driver of the kind of the in year improvements, but it might have an effect overall. The bigger point, I think, is the one that I mentioned earlier, the one that the OBR emphasis is just the uncertainty.
Actually, it's really hard to to know what's going to drive, how productivity is going to develop. That's always true. But I think AI is making that uncertainty even bigger than usual. So in our in our annual green budget, our look ahead of the budget, we have two model two sort of scenarios or broad brush. One was to say, look, AI might just in boost investment, give us a demand pick up in the short run, but actually not lead to higher sort of sustained productivity growth. Or it might increase productivity, make us more productive and increase growth.
And in the short run, those will look quite similar. But in the long run they could look quite different. So I think that for me, that uncertainty about productivity is as as important as any particular point estimate.
10:13
10:13
Speaker 2
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Speaker 2
Yeah. I'll just make a few points just to add to Helen's point. And just to underscore Helen's point, which is, I think, why productivity is so important to the public finances. On our calculations, a 0.1 percentage point increase in productivity reduces borrowing by about £78 billion by the end of the forecast horizon, so small changes can have huge impacts. As Helen mentioned, I will say I'm a little bit more optimistic on the productivity story. And Helen mentioned there's £100 billion of CapEx that have been pushed through by this government or the previous government and the previous chancellor.
And of course, there's more capital deepening. And so that is having some impact. We won't feel the full effect for years to come, but certainly, are we seeing it in the data from a capital perspective? I think so, but even beyond that, from the private sector perspective, our conversations with UK plc has been very much clear that since we've had some of the tax changes, wage growth has increased. We've seen reduced immigration as well. It has forced businesses to make some of the investment decisions that they've put off for more than a decade. And so digitalisation, automation.
So before even talking about artificial intelligence, you're starting to see some of those effects, I think, pan out in the data. I mean, you can just look at the GDP data this year. We've grown by about 2% with about 40,000 fewer employees, according to HMRC payroll data. So that just tells you there is a positive spin, I think, on the productivity story, professional services are seeing output increase by about 4%, hospitality 3%, retail 2.5% in terms of output per worker. So you are seeing a little bit of that coming through in terms of this productivity revival.
And of course, there's more capital deepening. And so that is having some impact. We won't feel the full effect for years to come, but certainly, are we seeing it in the data from a capital perspective? I think so, but even beyond that, from the private sector perspective, our conversations with UK plc has been very much clear that since we've had some of the tax changes, wage growth has increased. We've seen reduced immigration as well. It has forced businesses to make some of the investment decisions that they've put off for more than a decade. And so digitalisation, automation.
So before even talking about artificial intelligence, you're starting to see some of those effects, I think, pan out in the data. I mean, you can just look at the GDP data this year. We've grown by about 2% with about 40,000 fewer employees, according to HMRC payroll data. So that just tells you there is a positive spin, I think, on the productivity story, professional services are seeing output increase by about 4%, hospitality 3%, retail 2.5% in terms of output per worker. So you are seeing a little bit of that coming through in terms of this productivity revival.
10:15
10:15
Julie Minns
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Julie Minns
Official final question. Do I have just one final question? Interesting. In your view, the the former Chancellor did make a comment recently that she thought the productivity puzzle had been revised away, and that in the last two years, productivity has rebounded to the pre-financial crisis levels. I'm not sure, from what you said, that we have rebounded to the pre financial crisis levels. So I was interested in your view on that and whether there was anything more that you felt was missing from this budget that could have made a difference to support lasting productivity growth?
10:15
10:15
10:16
10:16
Speaker 2
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Speaker 2
Yeah, I think Helen's point output per worker has improved because of the various calculations that the ONS has made on the denominator side. So the the, the numerator side GDP data hasn't changed. It's just the number of workers that we assumed has changed. To Helen's point. Of course, output per hour has not changed much. And that ultimately is the biggest ingredient towards productivity and ultimately the public finances. So that has been on that metric. We still are a little bit of an outlier relative to the G7 in terms of what this budget has done to improve productivity.
I think the only thing I would say that could have amplified some of the effects are the financial transactions that were announced. We had an increase in the off balance sheet expansion via Puffin's, the public financial institutions, less clarity on what this money will be spent on. Hopefully, we will have a little bit more clarity. And I think that perhaps, I think, screams to some of the discontent or discomfort that the market has with these public financial transactions. But nevertheless, if there's one thing that we point to in terms of what's going to lift productivity, it's not the policy measures.
I think we all said that it's not going to move the dial, but could the financial transactions that are being pushed through £15 billion or £10 billion that have been allocated in this budget help medium term supply side growth? Yes, but the proof will be in the pudding in terms of what those projects are. We don't have a lot of sight and clarity as to what that looks like at this point.
I think the only thing I would say that could have amplified some of the effects are the financial transactions that were announced. We had an increase in the off balance sheet expansion via Puffin's, the public financial institutions, less clarity on what this money will be spent on. Hopefully, we will have a little bit more clarity. And I think that perhaps, I think, screams to some of the discontent or discomfort that the market has with these public financial transactions. But nevertheless, if there's one thing that we point to in terms of what's going to lift productivity, it's not the policy measures.
I think we all said that it's not going to move the dial, but could the financial transactions that are being pushed through £15 billion or £10 billion that have been allocated in this budget help medium term supply side growth? Yes, but the proof will be in the pudding in terms of what those projects are. We don't have a lot of sight and clarity as to what that looks like at this point.
10:17
10:17
Speaker 3
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Speaker 3
Anything just on the part of the puzzle, I think there are sort of two the two aspects to it worth distinguishing. One was just Post-financial crisis. Why did we look so different to other countries? And the answer is we don't look so different. Once you correct the data, it's still a little bit different, but not as different as we thought we would. The other is just why is it post-financial crisis? The growth rate came came down and it's not so much a puzzle. People have. People have reasons they think that's happening, but that is still something that happened.
And if we think about post-crisis, the point was not that we just had a good year. It's that year after year after year, we had this strong growth and it really compounds over time. And we have not got back to that. We have not got back to this year after year after year having strong productivity growth that really that really bends the dial. To the question earlier about why living standards have been different. Those previous decades look better not because they had the odd good year, but because they had lots of lots of good years.
And on the policy, I think, again, there was no there was no one thing the government could do was make it okay. But what I think we're not seeing yet from this or the previous government is enough of a focus on whatever area you're touching it do more to make it more pro-growth. So tax reform would be an obvious one. There was a ton of tinkering with the tax system. Maybe we'll come back to that, but none of it. I couldn't see any grand plan for a tax reform or anything that was going to say.
I'm at least chipping away on a problem towards a better end state. It felt very scattergun. I think that's an example where that approach, if in every area there was more of an approach across, we're going to move towards a better system than I think. Add it all up and you would start driving up growth.
And if we think about post-crisis, the point was not that we just had a good year. It's that year after year after year, we had this strong growth and it really compounds over time. And we have not got back to that. We have not got back to this year after year after year having strong productivity growth that really that really bends the dial. To the question earlier about why living standards have been different. Those previous decades look better not because they had the odd good year, but because they had lots of lots of good years.
And on the policy, I think, again, there was no there was no one thing the government could do was make it okay. But what I think we're not seeing yet from this or the previous government is enough of a focus on whatever area you're touching it do more to make it more pro-growth. So tax reform would be an obvious one. There was a ton of tinkering with the tax system. Maybe we'll come back to that, but none of it. I couldn't see any grand plan for a tax reform or anything that was going to say.
I'm at least chipping away on a problem towards a better end state. It felt very scattergun. I think that's an example where that approach, if in every area there was more of an approach across, we're going to move towards a better system than I think. Add it all up and you would start driving up growth.
10:18
10:19
Speaker 7
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Speaker 7
Thank you chair. Good morning. One of our pre-budget traditions has become speculation about how much headroom may have fallen or increased based on one year to the next. And I'm interested. Helen, can I start with you? First of all, just to confirm that we had 23 billion last year, it's now 15 billion after the budget. Does that mean it was an 8 billion fall, or did it fall further ? And the chance that built it up. But I'm also particularly interested in how much we can attribute that fall in headroom, specifically to the war in Iran.
10:19
Speaker 3
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Speaker 3
Thank you. So the the pre measures forecast, which is before any policy happens, had headroom falling by more. And then in the fiscal year, the rule, the year in which fiscal rules bind, the government have topped it up a little bit and made it slightly higher. Worth saying. I think always when these headroom conversations that we are talking about the difference in two very big numbers in that context, a number that's 2 or £2 billion up or down is really the same numbers. We shouldn't get excited about it being 13 or 15 or 12. They're all the same number in this context.
But the the down revision happened, and then the government's done a little bit in that year. It's basically borrowing more in the short run, having a net takeaway in the in the in the medium run, it kind of crosses over. And in that year, it's, it's pulling it headroom up a little bit on what's happening. There are various moving parts. I think what, what happens basically is the other bits wash out. And therefore the takeaway is that it's higher gilt yields. So higher government interest costs push up borrowing. And that's the kind of mechanical difference in the background.
What's happening is that the public finances are a nominal beast, by which I mean when you get higher inflation, you also get higher tax receipts and you get higher benefit spending. So those things are happening as well. In the background in the OBR forecast, there are also a bunch of other changes that my colleagues described as deep in the bowels of the forecast to do with things like changes in depreciation numbers. But all of that basically offsets each other. So what you're left with is this effect of government gilt yields, pulling, pushing up, borrowing and pulling down headroom.
But the the down revision happened, and then the government's done a little bit in that year. It's basically borrowing more in the short run, having a net takeaway in the in the in the medium run, it kind of crosses over. And in that year, it's, it's pulling it headroom up a little bit on what's happening. There are various moving parts. I think what, what happens basically is the other bits wash out. And therefore the takeaway is that it's higher gilt yields. So higher government interest costs push up borrowing. And that's the kind of mechanical difference in the background.
What's happening is that the public finances are a nominal beast, by which I mean when you get higher inflation, you also get higher tax receipts and you get higher benefit spending. So those things are happening as well. In the background in the OBR forecast, there are also a bunch of other changes that my colleagues described as deep in the bowels of the forecast to do with things like changes in depreciation numbers. But all of that basically offsets each other. So what you're left with is this effect of government gilt yields, pulling, pushing up, borrowing and pulling down headroom.
10:20
10:21
Speaker 3
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Speaker 3
The single biggest thing. And importantly, it's not a UK only story. So for a few years we got used to this idea that the UK was an outlier in the gilt market and we were being sort of had pressure on us look across lots of countries now and actually we don't . If anything, our gap is narrowing a little bit. This is a story of of, you know, and it's what's happening. It's the Iran war pushed up inflation expectations, pushing up, pushing up central bank interest rates and putting pressure on gilt yields. There are other things happening, like the fact that many governments are just selling a lot of a lot of bonds, and that's putting pressure on the market.
AI companies are now competing in the bond market, so it's not the only factor. But I think if the single biggest thing in change in the forecast between October and March, it's that war in the Middle East.
AI companies are now competing in the bond market, so it's not the only factor. But I think if the single biggest thing in change in the forecast between October and March, it's that war in the Middle East.
10:21
10:21
Bobby Dean
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Bobby Dean
Thank you. So I appreciate the difference in the numbers a lot that big when you're looking at what your pluses and minuses. But we did see how big of a difference headroom can make in terms of tax speculation. So earlier in the parliament we had very low levels of headroom, £10 billion. And that was seen as problematic because as soon as they were shifting global events, it started to lead to tax speculation. We've now we had that headroom sort of built up to a higher level under the previous chancellor, but it's gone back down again.
Is there a concern that the next time there's going to be a global event, that we're just going to go straight back to that position of tax speculation that creates uncertainty in the economy and causes other problems. Miss Miller.
Is there a concern that the next time there's going to be a global event, that we're just going to go straight back to that position of tax speculation that creates uncertainty in the economy and causes other problems. Miss Miller.
10:22
Speaker 3
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Speaker 3
The short answer is yes, absolutely. I think worth reminding people that even even the sort of 24 billion that Rachel Reeves built up was small historically back in the 20 tens, a buffer of something more like 50 billion would have been the norm. So even 24, we were saying, is small. Obviously 15 is even smaller. But I think also worth pointing out that it's not just the problem that big shocks could come along. Actually, we calculated that if you look at all the forecasts since the OBR was set up in 2010, and you look at the kind of the the between fiscal forecasts, the budget to the spring forecast, we think that in about a third of cases, 25% of cases, just an ordinary run of the mill forecast change, because as uncertainty would be enough, that mean that by March the government could be blown off course, its headroom could have could have disappear, not because some new big shock comes along just because forecasts are uncertain.
Of course, if a big shock comes along, then then you're in bigger trouble and your headroom has been eroded. And I think the point, you know, I agree with the point you're making, even if those shocks don't come along, the fact that they could come along and people know that if they came along, the Chancellor would have to change tax policy quite quickly. That alone is enough to get that speculation going. I think it also matters that we're in a situation where the government has set up the spending review for next year to look very, very difficult.
And in that context, people will be questioning whether the government wants to deliver that, whether they'll come back with more tax rises or more borrowing. And again, that will add to this sense of people know there's a big fiscal event coming, and whenever you have a big fiscal event coming, for whatever reason, people speculate about what's going to be in it.
Of course, if a big shock comes along, then then you're in bigger trouble and your headroom has been eroded. And I think the point, you know, I agree with the point you're making, even if those shocks don't come along, the fact that they could come along and people know that if they came along, the Chancellor would have to change tax policy quite quickly. That alone is enough to get that speculation going. I think it also matters that we're in a situation where the government has set up the spending review for next year to look very, very difficult.
And in that context, people will be questioning whether the government wants to deliver that, whether they'll come back with more tax rises or more borrowing. And again, that will add to this sense of people know there's a big fiscal event coming, and whenever you have a big fiscal event coming, for whatever reason, people speculate about what's going to be in it.
10:24
Bobby Dean
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Bobby Dean
Just on that, the last spending review obviously was a standalone event. Outside of fiscal measures been implemented, do you think that seems plausible for next year, given all the work they've got to do on potentially departmental spending on defence? And if if July 2027 comes true and the fuel duty rise kicks in by a 14% rise, which they may or may not want to do, it seems like a lot of work to do just in a spending review about fiscal measures.
10:24
10:24
Speaker 3
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Speaker 3
So under the under the framework that Rachel Reeves set up, which I think had had a lot to say for it, the fiscal rules become based on three years. You have a spending review. That means that the spending review is covers the year of the fiscal rules. That makes fiscal discipline easier to maintain. That's a good idea. And then the budget would have been the last moment to set the overall envelopes. And the spending review would have been next summer. I think that would have made a lot of sense. The government could still do that.
There's nothing to stop them. We don't know yet when they want to do the spending review, but they could still have it next summer. I think the issue is, do they want to take the current spending plans and take them to a spending review? If they do, great. And on the timing point, I don't think there's any reason why you couldn't get yourself ready. Of course, more time is always nice, but I think, you know, there's no reason why you couldn't do it by next summer. If they want to kick it back and do it next to a budget, that is going to be a whopper of a fiscal event because you're going to have a very big budget assembly.
There'll be a ten year plan that also has policy measures. There'll be other measures coming in, and if they're doing it because they want to raise more money or cut other spending, that will make it a very big event indeed. Which, again, to your earlier point about speculation, the bigger the fiscal event is, the more people will be trying to guess what the government's doing , and they're going to try and guess what, how they should change their behavior in advance.
There's nothing to stop them. We don't know yet when they want to do the spending review, but they could still have it next summer. I think the issue is, do they want to take the current spending plans and take them to a spending review? If they do, great. And on the timing point, I don't think there's any reason why you couldn't get yourself ready. Of course, more time is always nice, but I think, you know, there's no reason why you couldn't do it by next summer. If they want to kick it back and do it next to a budget, that is going to be a whopper of a fiscal event because you're going to have a very big budget assembly.
There'll be a ten year plan that also has policy measures. There'll be other measures coming in, and if they're doing it because they want to raise more money or cut other spending, that will make it a very big event indeed. Which, again, to your earlier point about speculation, the bigger the fiscal event is, the more people will be trying to guess what the government's doing , and they're going to try and guess what, how they should change their behavior in advance.
10:25
10:25
John Glen
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John Glen
Can I ask about the devolution agenda? A significant part of the new Prime Minister's approach? What effect and what analysis has been done of how that will affect sort of the public finances? I mean, you reasonably say we've only just started looking at it, but presumably that does unleash quite a lot of uncertainty, which must be quite difficult to then measure and account for in our public finances, Mr. Miller.
10:26
Speaker 3
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Speaker 3
So I think it's worth saying there are lots of moving parts here, and we don't yet have all the details about exactly how this revenue assignment is going to work. So we know that income, you know, mayors will lose their grants or lose part of their grants. They'll get a share of income tax revenue in in place of that. And there'll be some mechanisms as to how that evolves over time. In terms of the bigger picture, how does it affect growth? The answer is we don't know. I could tell you stories, which I think it would be good for growth.
I can tell you stories in which it won't be good for growth. The devil will be in the detail. We'll have to wait and see. But in terms of that will affect the public finances on the more mechanical angle of it. Then again, there's partly a what we expect to happen is in the next spending review, the government will decide kind of the initial allocations to mayoral authorities, and that will affect the spending review. And you have to decide basically how much to spend at a local level versus a central level and how to do the mechanisms for that.
At the moment, if you just take what the government's done first step, actually, in fiscal terms, it's relatively small. So I don't think it's going to be the thing that throws the spending review completely off off course. I think it's it will be its longer term impacts. And if it's the foothills of something much bigger, then a bigger devolution package with something like a Barnett formula for England or something could be much bigger. I think what we know about now is actually relatively self-contained, but it will it will matter. And again, it will matter in part depending on exactly how they how they choose to implement it.
I can tell you stories in which it won't be good for growth. The devil will be in the detail. We'll have to wait and see. But in terms of that will affect the public finances on the more mechanical angle of it. Then again, there's partly a what we expect to happen is in the next spending review, the government will decide kind of the initial allocations to mayoral authorities, and that will affect the spending review. And you have to decide basically how much to spend at a local level versus a central level and how to do the mechanisms for that.
At the moment, if you just take what the government's done first step, actually, in fiscal terms, it's relatively small. So I don't think it's going to be the thing that throws the spending review completely off off course. I think it's it will be its longer term impacts. And if it's the foothills of something much bigger, then a bigger devolution package with something like a Barnett formula for England or something could be much bigger. I think what we know about now is actually relatively self-contained, but it will it will matter. And again, it will matter in part depending on exactly how they how they choose to implement it.
10:27
John Glen
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John Glen
Thank you. I think my colleagues have got more to go on on that later on. Can I just just on this headroom figure? I mean, you rightly asserted what the relative historical 23.4 billion is, and now we're at 15 billion. The government would reasonably say, well, you know, it shrunk lower in the last year of the last conservative government. But as I understand it, you know, that puts us in quite a precarious position. Not much needs to change. If you look at the overall, isn't there a significant risk that unless that headroom is recovered to a higher level, to more like the previous Chancellor had it at, you know, the speculations over how it's going to be filled will naturally be part of the discourse, because you guys will point to it as happening.
What do you think about the sort of security of the 15 billion as a, as a, as a mode of operating?
What do you think about the sort of security of the 15 billion as a, as a, as a mode of operating?
10:28
Speaker 3
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Speaker 3
Yeah. So I think it's worth remembering why, you know, why do we have headroom? So the Chancellor has a fiscal rule that says they want to get to the budget, current budget balance by 20 2930. But because the forecasts are so uncertain, it makes sense to target a surplus. So you can be more sure that you're actually going to get to the zero that you want in that context, without forecasting uncertainty, I think it is reasonable for a government to say a shock came along before cars changed, rather than do a big change in tax measures.
Now I'm going to use that headroom. But to your point, it's not costless to do that because the cost of it is it adds the risk that something else will come. Another run of the mill forecast will come, the war will get worse. You know, something else will crop up and you'll have to make a change. So reasonable, but definitely not costless. Another problem I think history advises caution is that in principle, you could expect chancellors to allow this buffer to sort of naturally rise and fall with run of the mill forecast changes. What we've seen over time is when the headroom rises, it's spent down and when it falls, it's allowed to, it's allowed to fall.
And that asymmetry that you don't allow it to naturally rise in the good times you spend it, and then you allow it to fall in the bad times. That asymmetry builds in this kind of ratchet effect in borrowing. So I think, you know, what we would like to see in some sense is, yes, you might want to rebuild it in as you go forward, but also if in future the forecast improves a little bit, let's not get carried away and think that now we can spend that money because we should be thinking of it as a symmetric buffer.
Now I'm going to use that headroom. But to your point, it's not costless to do that because the cost of it is it adds the risk that something else will come. Another run of the mill forecast will come, the war will get worse. You know, something else will crop up and you'll have to make a change. So reasonable, but definitely not costless. Another problem I think history advises caution is that in principle, you could expect chancellors to allow this buffer to sort of naturally rise and fall with run of the mill forecast changes. What we've seen over time is when the headroom rises, it's spent down and when it falls, it's allowed to, it's allowed to fall.
And that asymmetry that you don't allow it to naturally rise in the good times you spend it, and then you allow it to fall in the bad times. That asymmetry builds in this kind of ratchet effect in borrowing. So I think, you know, what we would like to see in some sense is, yes, you might want to rebuild it in as you go forward, but also if in future the forecast improves a little bit, let's not get carried away and think that now we can spend that money because we should be thinking of it as a symmetric buffer.
10:29
Speaker 5
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Speaker 5
Can I just add on headroom briefly. I mean, these these comparisons between headroom and not that helpful, right. Because these are rules that chancellors define for themselves. So we're comparing headroom to to their own targets which have changed a lot through time. The important thing about this budget is not so much what's happened to headroom as that on average, it's added 10 billion or so to to borrowing. And I think that's kind of big picture. What matters. And then the, the, the you can so what you can look at instead is how does the current budget three years out compare to what current budgets tend to be?
And at £15 billion current budget surplus, which is the number we're all talking about 3 in 3 years time. If typical variation to the real world happens, it will end up being a £26 billion deficit in reality. And most of that is the things Helen's talked about, about chancellors tending to add more than they take away.
And at £15 billion current budget surplus, which is the number we're all talking about 3 in 3 years time. If typical variation to the real world happens, it will end up being a £26 billion deficit in reality. And most of that is the things Helen's talked about, about chancellors tending to add more than they take away.
10:30
John Glen
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John Glen
I think we now need to move, as indicated, to spending pressures. Obviously, there's a lot in there, and we talked about the possibility of the uncertainty around the spending review. But on this core issue that a lot of people are preoccupied with is when we're going to get to 3%, 3% of GDP on defense. If that is, commitment is made to 3% of GDP by 2030. Can you indicate what that would mean for other departmental spending? Because, you know, this is the core choice I think that, you know, has been framed. Mr. Miller, would you like to start on this and then we'll see.
10:30
Speaker 3
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Speaker 3
Absolutely. Thank you. So I think worth saying is that all we know so far is that the kind of the assumed total amount of spending across the rest of the Parliament, we don't yet know how the government wants to allocate it. And therefore, what we've done lots of is you can do different scenarios that say if this, this, and this, then that, but ultimately it is a choice. But if you take if you take the current spending envelopes, then it's also worth remembering that because of the high inflation we talked about, they are already less valuable than they were back in March.
We think just that higher inflation has wiped something like 8 billion off.
We think just that higher inflation has wiped something like 8 billion off.
10:30
10:30
Speaker 3
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Speaker 3
Yeah, exactly. So just in the same way that for households, when you have to spend more on your shopping, you have less money. That's that's true of the government too. Also worth saying that there's plenty of uncertainty there because what matters is the, is the inflation that's relevant for the government. And therefore, we don't yet know what inflation is going to be in the next 3 or 4 years for the government. So that number could be quite different. But as a sense of scale, there's already, you know, you've lopped off 8 billion effectively. We did an exercise where if if you it's also the case that that the growth in department is slowing in the in the plans over time.
Now, again, nothing wrong with that inherently, there's no reason why the state has to grow every year, but it's slowing relative to prices and it's falling relative to the size of the economy. So the state kind of being trimmed back. So if you do want to increase health spending and welfare spending and accommodate those inflation pressures and not make real terms cuts, we think you've got something like a £28 billion kind of gap. Now, that's not saying you have to raise it at all. I think there being a spectrum where you can either, you know, try and raise something on the order of 30 billion to plug all those gaps, which basically means have health spending grow at like 2.7%, which is what it got under the previous spending review, defense moving to 3% and everything else is flat in real terms, or you could not do any of that and impose those cuts, or you could have something in the middle.
You could hold back the NHS. The NHS is huge here. So what you do to the NHS has a big effect. If you are willing to hold the NHS at a very low, relatively low level, actually, that would free up more resource elsewhere. So there are endless sets of choices.
Now, again, nothing wrong with that inherently, there's no reason why the state has to grow every year, but it's slowing relative to prices and it's falling relative to the size of the economy. So the state kind of being trimmed back. So if you do want to increase health spending and welfare spending and accommodate those inflation pressures and not make real terms cuts, we think you've got something like a £28 billion kind of gap. Now, that's not saying you have to raise it at all. I think there being a spectrum where you can either, you know, try and raise something on the order of 30 billion to plug all those gaps, which basically means have health spending grow at like 2.7%, which is what it got under the previous spending review, defense moving to 3% and everything else is flat in real terms, or you could not do any of that and impose those cuts, or you could have something in the middle.
You could hold back the NHS. The NHS is huge here. So what you do to the NHS has a big effect. If you are willing to hold the NHS at a very low, relatively low level, actually, that would free up more resource elsewhere. So there are endless sets of choices.
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Speaker 3
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Speaker 3
I think. Yes, but the assumptions underlying the spending review already have some really punchy productivity assumptions embedded in them. So I'm basically everything I've just said to you assumes they can actually deliver this historically very, very fast productivity growth if they can. Great. I'd be very impressed if they can go even faster than that because it's so historically impressive.
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Speaker 4
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Speaker 4
No, I'm just going to add in the context of the excellent figures produced by the Resolution Foundation and the IFS. If you look at the analyses going forward of the protected parts of public spending, so the NHS, the benefit system and defence and the impact that has towards the end of the decade on unprotected services, the whole of the subnational government, MSAs, mayoral strategic authorities and local government lie in that unprotected part. So the whole of the this new sector that's going to help drive growth starts life in an unprotected sector of public.
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Speaker 5
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Speaker 5
Yeah. Thank you. I think on on spending overall, we just need to not be we need to just add a couple of caveats. One is there was a big boost to spending at the start of this parliament. So it's still the case that when you look across this Parliament as a whole, that day to day spending per person is growing at about 1.7% real on average, with quite an extreme profile, which is why Helen's right to be skeptical about those later years. But I think it is important to look at that picture as a whole.
We also had a slightly smaller population in this forecast than in previous ones, and I think we should that that that mitigates for small amounts of of the inflationary pressure. We also saw, again, this pattern of day to day spending being topped up in the in the kind of near term and, and then these very optimistic projections for the longer run. So day to day spending was increased by 9 billion across the kind of current years of the spending review, where those totals are meant to be fixed, albeit the kind of wasn't a big change when you look at day to day and capital together.
So so I think the inflationary pressures
We also had a slightly smaller population in this forecast than in previous ones, and I think we should that that that mitigates for small amounts of of the inflationary pressure. We also saw, again, this pattern of day to day spending being topped up in the in the kind of near term and, and then these very optimistic projections for the longer run. So day to day spending was increased by 9 billion across the kind of current years of the spending review, where those totals are meant to be fixed, albeit the kind of wasn't a big change when you look at day to day and capital together.
So so I think the inflationary pressures
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