Kwasi Kwarteng: will schools and hospitals need to find ‘£11bn cuts’ after Chancellor’s tax measures?

Kwasi Kwarteng’s mini-budget is causing concern about how it will impact public services.

The Chancellor announced his plans on 23 September, which proposed £45bn of tax cuts, without providing details on how this would be funded.

This resulted in the British Pound falling to its lowest rate against the Dollar, leading to mortgage lenders to withdraw offers and rates spike.

Although the Chancellor has scrapped his plan on the 45p tax rate after public outcry, there are still concerns about rising inflation rates and how this will impact stretched public service budgets.

Kwarteng has also stopped former Chancellor Rishi Sunak’s National Insurance Cost (NIC) increase, but has withdrawn the additional funding granted to public services. With the rising cost of inflation, many public services are finding themselves stretched.

So, could schools and hospitals end up having to find “£11bn of cuts”? Here’s everything you need to know.

What will happen to schools and hospitals?

The Independent have reported that schools and hospitals will have to find “£11bn of cuts”.

In a statement the Institute for Fiscal Studies (IFS) evaluated the impact of the mini-budget on public services, reflecting on Kwarteng withdrawing the additional funding allocated by the previous Chancellor for public services to manage the National Insurance increase.

They said: “When then-Chancellor Rishi Sunak increased National Insurance costs (NIC) in 2021, he also provided around £2 billion of extra funding to public services each year to compensate for the additional employer NIC. Kwasi Kwarteng has now reversed the NICs rise.

“From 2023-24, the Treasury is withdrawing that compensation from departments: the employer NICs cut means their staffing costs will be lower, and their budgets will be reduced by a commensurate amount.”

Adding that “spending plans are left unchanged” and that “due to higher-than-expected inflation, public services are still worse off than they were intended to be when public spending plans were set out last year.

“Departments have been told to pay for the costs of higher-than-expected pay awards from within existing budgets”

Speaking to the Independent, senior research economist at the IFS Ben Zarank said: “That will pose obvious challenges for stretched public services.”

Adding: “Higher inflation makes the government’s plans for public service spending less generous than they were originally intended to be.

“Next year, overall departmental funding will be about £18bn lower in real, inflation-adjusted terms than under the government’s original plans.

“That’s how much the chancellor would need to top up his plans by to compensate. If, as seems likely, no such funding is forthcoming, departments will have to absorb these cost pressures from within existing budgets.”

What was the National Insurance Increase?

The National Insurance Increase was brought in by former Chancellor Rishi Sunak, often dubbed as a “Health and Social Care Levy”.

It saw earners pay an additional 1.25% NIC rate from April 2022.

In his mini-budget, Kwarteng announced that the increase would be reversed from 6 November 2022.

Why is inflation so high?

The UK is currently in the grip of a cost-of-living crisis which has seen record high rates of inflation hit households hard.

Inflation has been steadily increasing after the Covid-19 pandemic, with factors including the war in Ukraine only exasperating the situation.

The current rate of inflation in the UK is 10.1%, with the Bank of England predicting this could peak by 13% in winter 2022. The target rate for inflation is just 2%.

What did Kwasi Kwarteng say in his speech?

The Chancellor gave a speech at the Conservative Party Conference yesterday (3 October) addressing his mini-budget and the “turbulence” it caused.

Kwarteng said: “I can be frank. I know the plan put forward only 10 days ago has caused a little turbulence.

“I get it. I get it. We are listening and have listened, and now I want to focus on delivering the major parts of our growth package.”

He added: “Because with energy bills skyrocketing, a painful Covid aftermath, war on our continent, a 70-year high tax burden, slowing global growth rates and glacially slow infrastructure delivery, we couldn’t simply do nothing.