Graphic: drowning in red ink

Schools and hospitals are likely to benefit from Gordon Brown’s decision to spend his way out of a recession but most departments still face a tight squeeze in the next two years.

On Monday Alistair Darling will fast-track a range of small and medium-sized capital projects in an attempt to rescue the construction industry. This will lead to more schools being refurbished, one-stop health centres being built, social housing accelerated and roads repaired. Bigger projects take too much time to plan, commission and design and are less likely.

The Chancellor may also announce extra winter fuel payments for the elderly and welfare spending will automatically rise in line with higher unemployment. But Mr Darling is not expected to revise significantly the overall three-year spending programme to 2010-11 outlined last autumn. This gave Whitehall departments only an average of 2 per cent growth in real terms, over and above a 2 per cent inflation target, much less than previous years. Many departments including Work and Pensions, Justice and Business have been allocated cuts in real terms.

Inflation is now on its way down and may fall to zero or below in the next year. But there is no guarantee, and at present public services are under huge pressure because of rising costs and reduced receipts. Mr Darling will tighten the screw by also demanding extra efficiency savings and predicting lower growth in future years.

Hospitals

Health spending increased by 7 per cent a year between 1999 and 2008 but this figure has nearly halved to an average 3.7 per cent per annum rise till 2010-11 and is likely to slow down further to 1 or 2 per cent after that.

Capital projects planned over the next 2½ years, including 152 extra one-stop health centres and 25 new hospitals, may be brought forward from planned spending in future years. But as 70 per cent of NHS costs are on staff, services are being squeezed, with finance directors saying that this may affect quality of patient care. NHS trusts in search of efficiency savings are already drawing up plans to reduce bills for non-clinical staff by 3 per cent, either through redundancies or freezing posts.

Schools

Education has followed the same pattern as health. Spending increased massively since Labour came to power from £29 billion in 1997 to £74 billion by 2012-11. But the rate of spending growth has halved from 5.3 per cent a year to 2.5 per cent per annum. As a result, teachers and university vice-chancellors fear that the money available will not be enough to cover the initiatives they have been asked to introduce.

The Government is expected to bring forward substantial capital spending on its 20-year, £45 billion Building Schools for the Future programme to rebuild or refurbish all secondary schools in England. There are concerns, however, that rushing the scheme could bring problems. Many existing projects are behind schedule and when the scheme began it was beset by problems as local authorities struggled to cope with the demands of a huge infrastructure project.

Town halls

Council taxes are likely to rise substantially next year as authorities face huge pressures on services and falling receipts owing to the credit crunch. Town halls, given less than a 1 per cent increase per annum until 2010, are already spending £250 million a year on temporary housing for the homeless, which is expected to soar in the next few months. But income has fallen with the housing market crash, as receipts from land searches and planning applications have fallen significantly. Local government chiefs have already calculated that councils will be £1.5 billion out of pocket because of high inflation and raised fuel and food costs this year.

Town halls are hoping that the Chancellor will bring forward hundreds of millions of pounds to fill potholes and repair roads, which are facing a £1 billion backlog. But Mr Darling is also likely to announce more funding for social housing, built by councils or housing associations.

Defence

The budget is already squeezed to the maximum and military chiefs are drawing up lists of equipment programmes that will either face the axe or be delayed. With no extra cash from the Treasury expected over and above the 1.5 per cent annual increase negotiated under the present three-year settlement, the Ministry of Defence is preparing for some momentous decisions. These could lead to severe cuts in the next generation of armoured vehicles, a reduced order for Typhoon/Eurofighter aircraft, reductions in new nuclear-powered submarines and cancellation of the future Lynx helicopter programme.

Transport

The Chancellor will also bring forward big infrastructure projects such as Crossrail, the east-west London rail link, which will improve connections to Heathrow.

Significant capital spending is also expected to be brought forward from later years for road extensions and expansions.

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