U.K. Spending Rises Fastest Since 2003, Bolstered by NHS Pay Increases

(Bloomberg) --

U.K. government departments increased spending last month more quickly than in any December since Tony Blair was prime minister as the ruling Conservatives eased their decade-long grip on the public purse.

The 10.5% increase from a year earlier, the most for the month since 2003, came as the government pumped money into pay rises for National Health Service staff, the Office for National Statistics said Wednesday.

Britain is loosening the purse strings after almost a decade of austerity that has brought down the deficit to under 2% of economic output from a postwar-high of 10% in the aftermath of the financial crisis.

The thaw began in 2018 when Theresa May, facing a public backlash, announced a long-term settlement for the NHS, where doctors and nurses, along with millions of other public-sector workers, had seen pay frozen or increases capped below inflation for years. The process has gathered pace under her successor Boris Johnson, with his chancellor promising the biggest increase in day-to-day spending in 15 years in the coming fiscal year and a budget that will deliver billions of extra pounds of infrastructure spending.

What our Economists Say:

“The tide is turning for the U.K. public finances. The boost to NHS spending lifted government outlays at the end of last year and September’s spending review will put further upward pressure on the deficit in 2020/21. All of this comes before the March budget where the government is likely to loosen the fiscal purse strings further.”

Dan Hanson, Bloomberg Economics

But the March 11 budget is unlikely to offer much in the way of extra day-to-day spending or significant tax cuts. New fiscal rules allow Chancellor Sajid Javid to borrow an extra 20 billion pounds a year for capital spending, funded by ultra-low interest rates, but limit his room for maneuver elsewhere. The current budget, which excludes investment, is meant to be in balance in three years and Javid is now on course to meet that target by the thinnest of margins.

Speaking at the World Economic Forum in Davos, Switzerland, on Wednesday Javid urged governments around the world to take advantage of cheap borrowing costs to boost capital spending.

“We can borrow for 30 years at almost minus 2% in real terms,” he said during a panel discussion. “I believe rates will stay low for long. It’s almost like a signal to the government to invest in infrastructure, invest in the future, whether it’s road, it’s rail, it’s broadband, it’s R&D, and to boost economic productivity.”

The latest snapshot of the public finances showed staff costs rising 7.4% and purchases of goods and services surging 10.5%.

Departmental spending over 2019 as a whole rose by almost 5%, the quickest since the crisis-era years. The last sustained period of growth above 5% was during the 2000s, when Blair and his chancellor, Gordon Brown, pushed up spending to around 40% of GDP -- levels not seen since the early 1980s.

Austerity has not been unique to Britain. Greece, Spain and Italy experienced deeper cuts in the aftermath of the European sovereign-debt crisis. But the pain in the U.K. has dragged on for far longer than foreseen, leaving spending as a share of GDP below the average of advanced economies and tax revenue at its highest sustained level since the early 1950s.

Johnson led the Conservatives to an emphatic election victory and the budget will almost certainly deliver on his promise of a modest tax cut for most workers.

Johnson and Javid want to boost investment in areas such as broadband and transport to boost productivity and shore up the economy as Britain prepares to leave the European Union on Jan. 31. Much of it may go to poorer parts of northern and central England, where pro-Brexit voters abandoned Labour for the Conservatives.

Higher departmental spending left the budget deficit between April and December at 54.6 billion pounds ($71.3 billion), up 8% from a year earlier, the ONS said. The deficit in December alone narrowed slightly to 4.8 billion pounds, thanks to solid revenue growth, a fall in net investment and lower debt-interest costs.

--With assistance from Jill Ward.

To contact the reporters on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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