The final two will face each other in a TV debate on Monday before weeks of hustings with Conservative members

In an analysis of the yesterday’s public sector pay awards published this morning, the Institute for Fiscal Studies thinktank says the new prime minister will have to decide whether to increase departmental spending budgets, to fund the higher-than-expected pay awards, or to require the awards to be funded from existing budgets, requiring cuts elsewhere. It says:

One option is to top up spending plans to at least partially fund the costs of higher-than-expected pay awards, shoring up departments’ ability to deliver on the government’s public service objectives (such as clearing the NHS backlog). This would come at the cost of higher borrowing and reduced fiscal room for the tax cuts seemingly desired by the entire field of would-be prime ministers.

The other option is to stick to existing spending plans, instead requiring public services to make some painful cuts: to other budgets, to headcount, or to the range and quality of service provision. Reducing the government’s public services ‘offer’ is a coherent response to a series of global economic shocks that make us poorer as a nation. But the government should be honest about what that implies for the NHS, local government, and other public services.