The CSR the Chancellor wanted to deliver
Tomorrow the Chancellor will deliver a Spending Review outlining cuts of around £11.5bn to public spending in 2015/16. The Spending Review after that looks set to be even tougher.
It is worth remembering though that this is not the Spending Review the Chancellor wanted to deliver, indeed we seem to be a world away from the scenario envisaged in the first OBR forecasts delivered three years ago.
The numbers below are all taken from that first forecast. This my attempt to write an outline of the speech the Chancellor originally thought he would giving tomorrow:
It has been three years since I delivered my first budget – the emergency budget of June 2010. Back then the UK stood on the brink of bankruptcy and the first task of the new Government was to put right the public finances and fix the mess we inherited from the previous Government.
We took difficult decisions – a VAT rise that nobody wanted, tight settlements for departmental spending and large changes to our welfare state. I argued at the time that these decisions could not be ducked. The last three years have been a difficult time for our public services and for the British people but we are now reaching the beginning of the end.
Many of those on the opposite benches warned that we were cutting too far and too fast. They have been proved wrong. They would extent the fiscal consolidation over two parliaments; I have achieved it in less than one. The spending period of 2011/12 to 2014/15 was tough but necessarily tough, things will now much easier in 2015/16 onwards.
The economy grew by 1.2% and by 2.3% in 2011. The impact of our policies really began to felt in 2012 when growth picked up to 2.8%. I can confirm to the House that the current OBR forecast is for growth of 2.9% this year – even better than last year, followed by 2.7% in 2014 and 2015. This is an historically rapid recovery from a financial crisis. Tight fiscal policy and looser monetary policy, the impact of our cuts in corporation tax and the general increase in confidence that we have presided over are the reason for this.
Unemployment has fallen every year since that budget and is forecast to be down to 6.1% by the end of 2015. Despite tough new welfare rules, real household disposable income has grown well.
We have achieved the much needed rebalancing of the UK economy. Last year two thirds of all growth came from net trade and rising business investment. Indeed business investment remains the major success story of this government – rising confidence and lower corporation tax led to an increase of 8.1% in 2011, an rise of 10.0% in 2012 and forecast rise of 10.9% this year. Over this Parliament private business investment will have grown by around 50%. We are winning the global race.
The Public Finances
Strong growth and tough decisions have secured our recovery and repaired our public finances.
I inherited a deficit of almost £155bn. Last year it was down to £89bn – a reduction of over 40%. This year the OBR expect it to fall to £60bn. By 2015/16 it is now expected the annual deficit will be down to just £20bn.
When I first set out my spending plans the deficit was some 11% of GDP, by 2015/16 it will just 1.1% of GDP – a 90% reduction.
The Fiscal Rules
I set myself two fiscal rules and to ensure that I could not ‘cook the books’ as the last Government did I handed over the forecast process to a new office for Budget Responsibility.
My first rule was to eliminate the structural deficit within 5 years. I can today report that I am on track to meet this rule a year early.
The cyclically-adjusted surplus on the current budget is set to be 0.3% of GDP in 2014/15. By the end of 2015/16, on current policy, the structural surplus will have risen to 0.8% of GDP.
My second rule was to provide an anchor and increase that the debt/GDP ratio would be falling by the end of the Parliament. Debt to GDP is set to peak this financial year at 70.3% before falling in 2014/15. Once again I have met my fiscal rules a year ahead of schedule.
I can turn now to my policy decisions for the forthcoming spending period.
By 2015/16 the structural deficit will have been eliminated. Debt/GDP will be falling. Growth will be either on trend or above trend. Unemployment will be falling.
Whilst we must ensure that we never again find ourselves in the dire situation of 2010 – with exploding deficits and a spendthrift attitude from the government – we have taken the necessary steps to ensure our house is in order.
Some warned that the ‘age of austerity’ would last a decade or more – they were wrong. Whilst there is no room for complacency the need for further cuts has passed. In the coming spend period there will be no further real terms cuts to departmental spending.
When we came to power, total managed expenditure was 47.5% of GDP – the government was spending almost half the national income. By 2015/16 this will have been reduced to a far more manageable 39.8%.
Decisions on taxation are the matter of budgets no spending reviews and further announcements will follow in the Budget next year, but at this stage I can say that the structural surplus of 0.8% of GDP in 2015/16 gives us some room to give the British people something back for sticking with us through the difficult years. This £15bn structural surplus should allow room for reductions in income tax beginning in 2015/16, the latest figures from HMRC suggest cutting the basic rate by one pence in the pound would cost around £4.3bn – even allowing for the need to maintain some surplus, we may well have space for a 2p cut in income in 2015/16 alongside safeguarding our public services.
It has been a difficult spending period, but we moved out of the danger zone, secured the recovery and can now look forward to better times ahead.