Philip Hammond has fired a warning shot across the bows of Tory leadership candidates vying for support by making big public spending promises, telling ministers to prepare for another tight public spending round.
The chancellor, who said in March that this summer’s spending review would put Britain “on the road out of austerity”, has written to all government departments telling them to expect spending increases from next April to rise only in line with inflation.
In a letter to permanent secretaries seen by the FT, Mr Hammond made it clear he was withholding the £26.6bn war chest he had amassed for higher spending in 2020-21 or lower taxes once the Brexit deal had been approved by parliament.
With Brexit on pause, Mr Hammond’s letter is a reminder of the tight financial constraints facing the government and a reminder to those seeking to replace Theresa May as prime minister of the risks of making unfunded spending promises.
Only this week Jeremy Hunt, foreign secretary, proposed higher defence spending. “It is simply not sustainable to expect one Nato ally [the US] to spend nearly 4 per cent of its GDP on defence while the others spend between 1-2 per cent,” he said.
Although the Treasury insists austerity is ending — spending reviews in 2010 and 2015 saw real terms spending cuts — some departments still face real terms cuts under the indicative spending totals set out in Mr Hammond’s letter.
The request for information and initial bids for money across Whitehall marks the start of a spending review process intended to cover three years, but Mr Hammond has said departments will get a simple one-year settlement if Brexit is unresolved.
“If we don’t have a [Brexit] deal done, the level of uncertainty that will remain probably makes it inappropriate to do a long-term spending review,” he said last month.
Mr Hammond, in the letter jointly signed with Treasury chief secretary Liz Truss, said he expected bids for day-to-day spending to sit within the indicative limits for the whole of the public sector of 1.2 per cent annual increases after allowing for price rises.
But the commitment to spend £26bn extra a year on the NHS has already swallowed up all of the real increases so far pencilled in, leaving nothing to end austerity in stressed areas such as defence, police, prisons or schools.
In the letter, Mr Hammond said: “Outside the NHS, the indicative envelope suggests departmental resource spending is set to grow on average in line with inflation over the forecast period — but the spending review will prioritise some areas over others within that envelope.”
His words indicate that some departments will face further cuts if a three-year spending review goes ahead under him as chancellor this autumn.
The letter marks a significant change of tone from the chancellor’s spring statement in March, which promised to to use the spending review to release the headroom in the public finances and choose between “increased spending on public services, capital investment in Britain’s future prosperity and keeping taxes low”.
The one glimmer of hope in Mr Hammond’s letter came in a pledge to issue “formal planning assumptions” when the full spending review is launched. These might differ from the current guidelines, but there was no guarantee with the chancellor saying: “In the meantime, the current indicative guideline remain the basis on which to plan.”
The chancellor had previously warned that if MPs did not vote for Brexit, he could not risk a spending review which released spare money in the public finances as it would be needed to offset the pain of a possible no deal Brexit.
He has said he would not hold a full three-year spending review this year if a Brexit deal was not passed by the time MPs go on their summer holidays in late July and instead patch together spending totals for one year only once the current plans run out next April.