The chancellor will be under pressure to find an extra £10bn a year in this autumn’s spending review to meet the costs of the pandemic to the UK’s health, education and transport systems, the Office for Budget Responsibility said on Tuesday.
The fiscal watchdog, in its annual report on long term risks to the public finances, said the degree of fiscal damage associated with the pandemic would ultimately depend on the degree of “economic scarring”, which it said was too early to assess with any certainty.
But the OBR warned there were more immediate “material” risks to the fiscal outlook, because departmental plans at present made no provision for virus-related spending beyond this financial year. Instead, Rishi Sunak’s March Budget had cut total spending by £14.5bn a year from 2022-23 onwards relative to the government’s pre-pandemic plans.
The need to pay for test and trace and revaccination programmes, while dealing with a backlog of non-Covid related treatments and tackling a surge in mental health problems, could create pressures of about £7bn a year on health budgets, the OBR said.
Meanwhile, schools might need a further £1.25bn a year to help pupils catch up with lost learning, while it could take about £2bn a year to fill a hole in fare revenues if passenger numbers on the railways and London’s transport system did not return to pre-pandemic levels.
The government could manage these pressures by cutting spending on other pre-pandemic priorities, the OBR said, or it could choose to increase total spending — which would either require tax increases, or “put at risk the chancellor’s aim of balancing the current budget and getting debt falling by the middle of the decade”.
Sunak said the risks discussed in the report “underline the importance of returning our public finances to a more sustainable path over the medium term” — confirming the “difficult choices” made at the last Budget.