Government Spending Squeeze: Simply Undeliverable
The most attention grabbing graph of last week (trust me, I keep an eye for these things) was this:
As the OBR noted:
Our forecast implies that the UK’s budget deficit will have fallen by 11.1 per cent of GDP over the nine years from 2009-10 (around £180 billion in today’s terms). Around 80 per cent of the reduction is accounted for by lower public spending. This will take government consumption of goods and services – a rough proxy for day-to-day spending on public services and administration – to its smallest share of national income at least since 1948, when comparable National Accounts data are first available.
I’m inclined to agree with Declan on this:
16% is a silly figure. In saying this I intend no disrespect to the OBR. On the contrary, I assume they intend the figure to be seen as silly- as a covert critique of fiscal plans which, while coherent in a purely accounting sense, are essentially fantasy.
The Chancellor doesn’t have ‘plans’ to reduce spending on public services to pre-welfare state levels. He doesn’t have a plan at all, just a set of forecasts intended to maximise political advantage in the run-up to the next election. After which, assuming he is still chancellor, he will either raise taxes or reschedule fiscal consolidation again, as would any chancellor who inherits this mess.
So the real message from this forecast, I suggest, is not about Conservative plans to roll back the state. It is that the government is going through the motions of offering completely irreconcilable outcomes in the hope that nobody will notice the implications until they’ve secured a second term.
is this realistic, or might it imply either less deficit reduction or a combination of further net tax rises or benefit cuts?
Not only do I think that this is not realistic but nor, it would seem does the Treasury. Paragraph of 1.87 of the Autumn Statement Document seems to me fairly crucial:
Achieving the government’s fiscal aims will mean further consolidation over the course of the next Parliament. There are choices to be taken about the composition of further savings and these should be driven by achieving the right balance between the individual and the state. At the next Spending Review, the government will need to look again at the trade-offs between departmental budgets (DELs), elements of annually managed expenditure (AME) and tax. (My emphasis)
As Rick has clearly explained:
Given that the OBR forecasts the combined costs of health, education and long-term care to be somewhere between 12 and 13 percent of GDP by the end of this decade, that only leaves 3-4 percent of GDP for everything else…
Now take off defence, which is around 2.5 percent, and you don’t have a lot left. With a budget of 16 percent of GDP for all public services, the state would simply have to stop doing things. Lots of things. That would be very uncomfortable…
What are the alternatives? According to the IFS, just to avoid the accelerated cuts and keep the spending reductions at the rate they have been over the past four years would need additional tax increases or welfare cuts of £12 billion a year.
Welfare cuts of this size would be extremely difficult, which leaves a good chance of additional tax increases after the next election.
Who ever carries out the Spending Review in 2016 will not stick to these plans – they are simply undeliverable.
Either the pace of deficit reduction will be slowed or we are looking at a £12bn tax increase (HMRC Ready Reckoners suggest this would mean about 3p on the basic rate of income tax, 3p on NICS or a 2.5% VAT rise).
I can’t help but think a lot of last week’s Statement was more about pre-election posturing than economic policy.