A report by Andrew Fisher & John McDonnell MP

Introduction

Given consistently strong polling leads for the last year, and the ongoing and multiple failures of the incumbent Conservative Government, Labour is likely to win the next election.

The inheritance of that Labour government will be the toughest of any incoming administration in living memory.

Across our public services we can see the destructive impact of austerity: underfunding, backlogs and chronic understaffing. Cuts to social security and a growing housing crisis have contributed to the deepest and longest cost of living crisis on record.

The effects on people have been devastating: more people living in poverty, more families in temporary accommodation, without a home to call their own, living standards falling, and life expectancy stalling.

The next Labour Government not only faces these social crises, but an economic crisis too. Since the banking crash, the UK economy has been virtually stagnant. Austerity compounded that, hitting demand; and Brexit, the pandemic and the Ukraine war added further trauma too.

A latent element of climate change denial in the Conservative ranks has undermined the policy programme needed to tackle the onrushing climate crisis.

Weak growth, low investment, weakened public services and a threadbare social security net are a toxic combination. Bold policies will be necessary just to stop the rot.

This paper sets out the scale of the challenge facing an incoming Labour government if it is to improve the situation facing our economy, our public services and our people.

John McDonnell MP  October 2023

Foreword

Across a number of key areas, this report sets out the stark reality of what a Labour Government is likely to inherit – given what we know, probably no more than 12 months from the next general election.

It looks at a series of reasonable benchmarks for our public services and what all of us, as citizens and public sector workers, should expect from them.

The report sets out what sort of spending is required to meet key targets, or to restore funding to 2010 levels, or to meet the average spend in particular policy areas among comparable nations. In some areas a menu of options is presented.

We have not attributed costs where the Labour leadership has ruled out spending commitments either on the revenue side (e.g. on scrapping tuition fees) or on the capital spending side.

All the figures presented are taken directly from publicly available sources and cited – any extrapolations are my own.

This report is not a comprehensive evaluation of all government spending areas, so is an underestimate of the daunting scale of investment needed. We now need to start the debate about how that can be funded.

Andrew Fisher  October 2023

• Health

Throughout the 2010s the NHS suffered the longest funding squeeze in its history – with average annual increases of around 1 per cent, compared to the long-term average of closer to 4 per cent.

In part due to the pandemic as well, the NHS currently has the longest waiting lists on record – over 7.7 million – and around 130,000 staff vacancies.

Research by the Health Foundation shows that overall if the UK had matched EU14 levels of spending per person on health, day-to-day running costs would have been £39 billion higher each year, on average, over the decade 2010 to 2019.

However, the UK had a larger increase in health spending in 2020 in response to COVID-19 than any EU14 country. In the UK spending increased by 14 per cent compared with the EU14 average of just below 6 per cent.

This in part reflects the extra capacity needed due to the prior austerity, and also the fact that the UK was one of the worst hit countries by the pandemic. The lack of comparable data available yet as health services emerge post-Covid make it very hard to present credible comparable international data (especially as some countries were hit worse by Covid – and therefore spent more – than others).

However, recently the Government has published its NHS workforce plan, which has been endorsed by both the Conservative Government and the Labour Opposition.

According to the IFS,, the workforce plan requires an average 3.6 per cent per year increase in NHS funding to be delivered. This compares with the currently projected 2.4 per cent average annual increases.

o By the end of the next Parliament (2028/29) this equates to an extra £9 billion per year in NHS spending (My calculation based on HMT figures from Budget 2023 and IFS estimate of required uprating), just to deliver the workforce plan. The IFS says that the final figure is equivalent to an extra £52 billion by 2036/37 in today’s terms.

• But meeting the NHS workforce plan is the minimum. To expand NHS capacity and bring down waiting lists requires wider investment that goes further and faster.

o To increase NHS spending by 4 per cent a year – around the long-term average – would cost an extra £10 billion a year by the end of the next Parliament.

• Mental health

Mental health services in England received a record 4.6 million referrals during 2022 (up 22 per cent from 2019), with the number of people in contact with mental health services steadily rising. Between 2017 and 2022, rates of probable mental disorder increased from around 1 in 8 young people aged 7-16, to more than 1 in 6.

The number of women waiting for perinatal mental health care increased by 40 per cent in the six months to March 2023. The Royal College of Midwives has called for the recruitment of 350 extra specialist perinatal mental health midwives.

Mental health is clearly correlated with deprivation – with those in the most deprived decile more than twice as likely to be in contact with mental health services as those in the least deprived decile.

The mental health workforce in the NHS has not increased sufficiently to meet rising need. While the number of FTE doctors in CAMHS has increased by 16 per cent since 2016, the number of people in contact with services has increased by 327 per cent over the same period.

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To meet need and increasing demand, the BMA estimates that the additional £2.3 billion annual funding put into mental health services for 2023/24 should actually be £5.2 billion.

o That requires an additional £2.9 billion a year in additional ringfenced funding for mental health services.

• Social Care

According to industry body, Skills for Care, there were 165,000 care worker vacancies in England at the end of March 2022 – covering residential care home workers and domiciliary care. (Figures of the end of March 2023 are expected to be published in October 2023.)

Chronic low pay and job insecurity are driving higher vacancy numbers. Assessment by the charity Community Integrated Care found that care workers in England are paid on average £8,000 a year less than NHS staff with the same skills. Many can find higher pay – and more sociable hours – working in the retail sector and other parts of the economy.

According to Age UK, there are 2.6 million people over-50 in England with unmet care needs.

In 2022, care worker pay in Scotland was 49p per hour higher than that in England. In April 2023, the UK minimum wage rose to £10.42 per hour, but care workers in Wales were guaranteed a minimum of £10.90 per hour.

Unpaid family carers – those who can prove they are providing care to a loved one for at least 30 hours per week – are able to claim Carer’s Allowance, which is currently paid at just £76.75 per week.

• Increasing the pay of care workers in England – just to the level of care workers in Wales and Scotland – would cost in the region of £1.3 billion (Equivalent to a rise of 49p per hour – based on 1.78 million care workers in England working an average 30 hour week).

o Bringing care staff into line with NHS pay rates would cost £14 billion a year

• Recruiting enough care workers to halve the current vacancy rate of care workers in the UK would cost a minimum of £1.7 billion in wages alone

o Additional costs (employers’ NI etc) would likely have offsetting savings in terms of reducing the number of delayed discharges for want of a care package; and by reducing the number of A&E admissions through neglect

• Increasing Carer’s Allowance for the 1.3 million carers claiming it, would provide dignity to those dedicated people

o Increasing Carer’s Allowance to the level of Statutory Shared Parental Pay (£172.48) would cost an additional £6.4 billion a year, which would go some way to recognising the 30+ hours of caring they provide, week-in, week-out

• Education

Education is a vital to our future growth prospects – an investment in the future. Research shows that smaller class sizes (fewer pupils per teacher) benefits children; and investment in further and higher education is vital to deliver a skilled workforce, which attracts companies to invest in the UK.

During the 2010s the schools budget was cut, the adult skills budget was slashed and funding withdrawn from universities as tuition fees were trebled to over £9,000 per year.

It has been estimated by the Institute for Fiscal Studies that experienced teachers’ pay has been cut by up to £6,600 in real terms since 2010 – that’s over £500 per month. We look at public sector pay separately later on in the report.

• In 2010/11, education spending was 5.4 per cent of GDP. A decade later that had dropped to 4.4 per cent (2020/21)

o Increasing education spending to 2010 levels, as a percentage of GDP, would cost an additional £21.3 billion per year

• OECD analysis puts UK public spending on education at 3.9 per cent of GDP in 2018. This was 19th highest out of the 37 OECD members with data on this measure and below the OECD average of 4.1 per cent

o To increase UK public spending on education to the OECD average would cost a more modest additional £4.8 billion per year

• Local government

Local councils in England have taken the brunt of austerity since 2010. This has resulted in the closure of local facilities and huge cuts in services – including to councils’ statutory provision like social care and children’s services.

Since Northamptonshire became the first council to effectively go bust in 2018, Croydon, Northumberland, Nottingham, Slough, Thurrock, Woking and Birmingham councils have all issued Section 114 notices. Several more councils are on the brink of having to issue a Section 114 notice too – and likely will have before a general election in 2024.

• According to the National Audit Office, local authorities experienced a 49.1 per cent real terms reduction in central government funding between 2010/11 to 2017/18.

• The Institute for Government calculates that resource spending for councils in England has been cut by 31 per cent between 2010/11 and 2018/19. This equates to a drop of £18.5 billion in annual funding in that decade. Since then, local government funding increased in response to the pressures of the pandemic and wider economic downturn.

o Nevertheless, it is estimated that increasing council funding to 2010 levels to restore services would cost approximately £15 billion per year.

• Justice

There is a crisis in our justice system caused by more than a decade of austerity. At the end of 2022, there were 61,737 outstanding serious-crime cases – the highest year-end figure on record.

Since 2010, over 300 courts (over half the courts in England & Wales ) have been closed and sold off. The Criminal Bar Association says, a shortage of defence counsel and prosecutors – caused by real terms cuts in pay – has added to the crisis. In the first nine months of 2022, 235 Crown Court trials were put off on the day they were due to start, because there was no prosecutor available.

Many are concerned that fair access to justice in being undermined due to cutbacks and delays.

• The Ministry of Justice has seen its funding cut in real terms by over 35 per cent since 2010

o Reversing austerity in the Justice sector would cost £3.8 billion a year

• Tackling poverty and inequality

Child poverty has increased significantly since 2010 and is likely to continue rising: currently unemployment is increasing, and wages are lower in real terms than in 2008.

Working age disabled people are 50 per cent more likely to be living in poverty than non-disabled people.

The UK’s social security system is one of the least generous in Europe. Unemployment benefit is now worth just 14 per cent of average earnings, down from 24 per cent in 1980-81 – among the lowest in the OECD. (See data from Resolution Foundation report ‘From safety net to springboard’.  In the report, the Resolution Foundation suggests a cheaper alternative based on previous earnings which costs £0.4 billion – but this would have much narrower coverage).

In 2015, the then Prime Minister David Cameron committed the UK to the UN Sustainable Development Goals. Target 1.2 commits the UK to “by 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty … according to national definitions”.

According to the Resolution Foundation, “absolute poverty is projected to be higher in 2029-30 than in 2020-21. The rate is projected to be lower in 2029-30 than in 2015-16, but by only 8 per cent (or around 300,000 people, accounting for population growth) rather than the cut of over 50 per cent (or a fall of 5.9 million people) that the SDG target 1.2 implies.”

• DWP figures show that child poverty has increased by 600,000 since 2010 – from 3.6 million to 4.2 million

o Removing the two-child benefit cap would remove 250,000 children from poverty and cost £1.3 billion

• 104,510 households were in temporary accommodation on 31 March 2023 (including 131,370 children) – up 10 per cent in a year

o Increasing Universal Credit (and other legacy benefits) by £20 per week would cost in the region of £6 billion (Labour campaigned to maintain the £20 weekly uplift in Universal Credit, which was withdrawn by the Chancellor Rishi Sunak in September 2021).

• Increasing unemployment benefit back to 1980 levels (from 14 to 24 per cent of average earnings) would cost an estimated £4.6 billion a year (based on current levels of unemployment)

• Public Sector Pay

The public sector has suffered real terms pay cuts since 2010. This has resulted in huge problems of recruitment and retention across the public sector.

The NHS has over 130,000 vacancies; while teacher recruitment only hit 59 per cent of its target last year. Better public sector pay is key to improving public services.

• Average weekly public sector pay is £45 less per week in real terms that in 2010 – equating to a real terms cut of £2,340 per year (Nominal regular public sector pay was £461 per week in May 2010 (ONS data). Uprating for CPI inflation to July 2023 would make that £674.85 (Bank of England calculator). Instead regular public sector pay was £629 per week for June 2023).

o To restore real terms pay to 2010 levels would cost £13.6 billion per year in additional wage costs.( Based on above and ONS public sector employment data),

• The IFS estimates that the NHS workforce plan requires an average 3.6 per cent per year increase in funding to be delivered. This compares with the currently projected 2.4 per cent average annual increases.

o By the end of the next Parliament (2028/29) this equates to an extra £9 billion per year in NHS spending  (My calculation based on HMT figures from Budget 2023 and IFS estimate of required uprating), just to deliver the workforce plan.  The IFS says that the final figure is equivalent to an extra £52 billion by 2036/37 in today’s terms.

Capital spending

Effective and consistent levels of public investment are key to delivering consistent and stronger economic growth. Analysis by the IPPR shows that since 1995 UK public investment has never even reached the average level of other G7 countries or the OECD club of developed economies.

According to the Resolution Foundation, had the UK’s level of public investment been at the OECD average over the past two decades, it would have been £500 billion higher.

For too long the UK was overly reliant on the deregulated and destabilising finance sector to power UK growth. But since the global financial crash in 2008, average UK annual growth has been just 1.05%.

• Climate change

The UK has legal commitments to reach net zero by 2050; for 100 per cent renewable electricity generation by 2035; and to ban the sale of all new petrol and diesel cars by 2035.

Labour is seeking to bring these final two commitments forward to 2030, and has committed to investing £28 billion a year by the middle of the next Parliament until 2030, subject to meeting its arbitrary fiscal rules on debt.

The IPPR Environmental Justice Commission previously called for a £300 billion, 10-year green investment programme to deliver economic prosperity, create jobs, tackle regional inequality, and address climate change and nature’s decline.

The Committee on Climate Change said in June 2023: “policy development continues to be too slow” and “our confidence in the UK meeting its mediumterm targets has decreased in the past year.”

• For solar power, the UK ranks sixth in the G7 (only above Canada) for overall installation capacity and for capacity per capita.

o In the last six years UK capacity has increased by 124 per cent, but that is below Italy (130 per cent), Germany (161 per cent), Japan (184 per cent), France (244 per cent) and the US (280 per cent)

• For wind power, the UK ranks third in the G7 for overall installation capacity

o However, progress has slowed in recent years – with new installations since 2019 only increasing by 18 per cent compared with 36 per cent for 2016 to 2019.

o China installed more wind power capacity in 2022 alone than the UK has in total

The UK also has the most poorly insulated housing stock in Europe. A large-scale insulation and retrofit programme is required – which will save on household energy bills, reduce emissions and create jobs.

As the Conservatives retreat on green investment, housebuilding targets and transport infrastructure so an incoming Labour Government must make the case for more job-creating, wealth-producing, emissions-reducing investment.

Conclusion

This report examines just some of the challenges an incoming Labour government will face.

Overall, the scale of what is needed across our public services just to reverse austerity cuts and deliver modest expansions is likely to be in excess of £70 billion extra in day-to-day spending.

Labour must also be making the case for far greater public infrastructure investment to match that of similar nations.

So far, the tax changes Labour has announced amount to around £5 billion in extra revenue – and that has already been earmarked for additional spending on good policies like free breakfast clubs, mental health counselling in schools and NHS staff training.

Without further redistribution of wealth, the argument that growth will be capable of paying for the significant investment needed in our public services appears just unrealistic.

The average growth rate since the banking crash has been 1.05 per cent; and growth this year is currently forecast to be 0.4 per cent.

On most economic models increasing our growth rate by 1 per cent a year (no mean feat) would bring in around £12.5bn – but growth on this scale requires a huge level of upfront investment, which in turn takes time to produce results.

Our country desperately needs a Labour government to be successful in addressing the appalling legacy of a broken Britain that it will inherit from the Conservatives.

To be successful it will need an honest appraisal of the scale of the problems that need to be tackled, an effective policy programme sufficient to meet this challenge, and also clarity on how much this programme will cost and how it is to be funded.

We have not explored in this report the options available to the Labour government for funding a policy programme that could meet these challenges. That will be reserved for a further detailed report.

John McDonnell MP has been the Labour MP for Hayes & Harlington in west London since 1997, and was Shadow Chancellor from 2015-2020. Andrew Fisher is a freelance policy researcher, columnist and trainer. He was the Labour Party’s Executive Director of Policy & Research from 2016-2019.

Image: John McDonnell MP. Author: Rwendland,  licensed under the Creative Commons Attribution-Share Alike 4.0 International license.