The OBR reported there would be a £10bn reduction in day-to-day spending next year compared to levels planned in March © FT Montage/Getty/AFP

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Rishi Sunak’s spending review slashed the UK’s foreign aid budget while simultaneously boosting spending on defence ahead of a coming squeeze on public spending following the recovery from the Covid-19 outbreak.

While Mr Sunak announced headline-grabbing spending pledges for next financial year on schools, hospitals, police and prisons, the Office of Budget Responsibility fiscal watchdog reported there would be a £10bn reduction in day-to-day spending next year compared to levels planned in March — and this would rise to nearly £13bn in 2024.

This future downward pressure on public spending would force “hard choices” towards the end of this parliamentary term, warned Torsten Bell, director of the Resolution Foundation think-tank, particularly for “unprotected” departments, like local government and the Home Office.

In the short term, the decision to cut the overseas aid budget from 0.7 to 0.5 per cent of GDP meant the Foreign, Commonwealth and Development Office budget took one of the deepest cuts in Wednesday’s spending review, shrinking by more than £4bn next year.

Despite a token £14m for the refurbishment of IT systems and embassies in Washington, Paris and Ottawa in order to better “represent the UK’s global role and ambition”, the overseas aid budget will fall to almost £10bn next year — down from £14.6bn in 2018. 

Chart of Whitehall's winners and losers in the 2020 Autumn Spending Review. HMRC received the biggest per cent increase compared with 2020/21 level with Foreign Office and Housing and Communities receiving the biggest decrease

However, the Ministry of Defence will see a cash increase of £24bn over the next four years, compared to the 2020-21 budget, with spending rising £4.8bn next year. The total pledge is £16.5bn more than promised in the 2019 Tory manifesto.

The decision to cut the aid budget while increasing funding for defence was slammed by the charity sector. Jean-Michel Grand, executive director of Action Against Hunger UK said the decision was “disastrous”, while Justin Welby, the Archbishop of Canterbury called the cut “shameful and wrong”.

Mr Bell warned that maintaining such high defence spending while making good on a pledge to return to spending 0.7 per cent of GDP on overseas aid as soon as possible would make it feel like austerity had not ended for many public services in the coming years.

“Overseas aid is obviously the big immediate loser — but in the longer term the bigger loser will be unprotected departments who will face further cuts as a result of lower than previously planned public spending,” he said.

However, Mr Sunak allocated funds to continue the short-term reversal of cuts made after the global crisis.

The Department of Health and Social Care, which is in the second year of a five-year funding settlement, will receive a cash increase of £6.6bn in 2021-22, including an additional £3bn to support its recovery from the impact of Covid-19, with £1bn earmarked for tackling the backlog of treatment cancelled or postponed due to the pandemic. Mr Sunak claimed the government would also make good on its promise to fund the recruitment of 50,000 extra nurses.

However Sally Warren, director of policy at the King’s Fund, said despite the extra money it would still be “difficult” for the government to fulfil its manifesto commitments on recruitment and hospital building.

Other nominal winners in Mr Sunak’s review include the Department for Education. The schools budget will increase by £2.2bn next year, which the chancellor said put the government “well on the way” to meeting an existing promise of a £7.1bn funding increase by 2022-23. 

Education groups welcomed the money but warned it would barely make up for the austerity cuts of the past decade. “The extra money only takes us back to 2010 levels,” said Natalie Perera, executive director of the Education Policy Institute think-tank. 

The Home Office also received a £1bn boost, which includes £400m to fund the recruitment of 20,000 extra police officers by 2023 in England and Wales.

The Ministry of Justice will receive an extra £337m — including £275m to handle greater volume of court cases expected to come through the system as police numbers rise. The government also pledged £1.25bn of new money to create 18,000 prison places. 

The government also confirmed for the first time the size of the UK Shared Prosperity Fund, which will replace EU structural funds. There will be a £220m pilot programme next year and the fund will grow to £1.5bn annually. This was announced alongside £4bn for a “Levelling Up Fund” to support local infrastructure projects, which was linked by some MPs to the cut in the foreign aid budget.

There were many losers in the spending review, however, including local government and recipients of the universal credit welfare benefit — the government declined to extend a £20 increase to the benefit introduced during the pandemic.

And while Mr Sunak created space for local authorities to raise council tax charges to help pay for social care bills, raising up to an additional £2bn, the Local Government Association said the rises would place a “significant burden” on households. Overall the chancellor allowed for a potential 4.5 per cent increase in core council spending, but the LGA said the long-term outlook remained “unclear”. 

There were also pledges for the devolved administrations, with the chancellor announcing that Scotland would receive £2.4bn in extra funding next year, with Wales getting an additional £1.3bn and Northern Ireland £900m. However the Scottish government complained that the review would result in a 5 per cent cut in cash terms in the capital spending grant from Westminster next year.

And while the business department’s core budget fell by £700m, it has been allocated £3bn of new funding as part of Boris Johnson’s £12bn plan for a “green industrial revolution”, leaving the department’s budget significantly higher than 2019 levels.

The other department to shrink was the Ministry of Housing, Communities and Local Government, with its capital budget falling by £5.4bn. The sharp drop was partially due to a one-off £1bn pledge to support the repair of tower block cladding after the Grenfell tower fire.

Reporting by Peter Foster, Helen Warrell, Jasmine Cameron-Chileshe, Sarah Neville, Bethan Staton, Andrew Bounds, Mure Dickie, Nathalie Thomas, Philip Georgiadis, George Hammond, Judith Evans and Arthur Beesley.

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