Austerity, past, present and yet to come: the OBR’s outlook for the public finances
The Office for Budgetary Responsibility (OBR) working paper No. 7 ‘Crisis and consolidation in the public finances’ has unsurprisingly generated a good deal of commentary on spending ahead of the crisis, and the outlook for the public finances into the future. The document serves as a stark reminder about the nature and scale of austerity policies in the past and yet to come. A good deal of the story can be told through three of the OBR charts.
Their chart 1.4 shows how the composition of public finances will have changed in order to bring the budget back into surplus by 2018-19. (Though I should stress that this assumption and all the below analyses are based on a view of austerity and transmission to the economy that follows from the OBR model and judgements that are far from matters of fact.)
The Orwellian colour scheme shows the main increases to welfare spending, up around 1 per cent of GDP (despite substantial cuts, spending here continues to rise mainly as a result of falling real wages increasing tax credit eligibility), and debt interest, up by around 1½ per cent of GDP (again, higher than was previously expected as a result of poorer than anticipated economic performance leading to our debts being paid off more slowly than previously planned). Apart from capital spending, the change moving the budget back into balance is a severe reduction on ‘public services spending’. The OBR again emphasise the magnitude of this change, observing that reduction would “reduce spending on public services and administration probably to its lowest share of GDP at least since 1948 – and on some data the lowest since 1938.”
The OBR include a caveat, stressing that “real per capita spending on public services would still be twice as high as in 1948 …” (and then the very confusing “…and perhaps only at its lowest since 2003”). But there is rightly a caveat to the caveat, noting the difficulties of estimating government output in real terms. It most certainly should not be taken to mean that we now have twice as many or twice as good public services than we did in 1948; we simply do not know.
Chart 3.13 shows how the cuts have evolved over time and in political terms (they use the approach taken by the Institute for Fiscal Studies (IFS), who have undoubtedly made the coming points before). The columns show the cumulative change in policy over time, so that the impact of austerity in any one year is the difference between the relevant two consecutive columns. The policies are measured as a share of GDP: with GDP projected at £2,000 billion in 2018-19, total austerity at that point of 10 per cent of GDP is therefore equivalent to £200 billion.
The cuts proposed under Labour’s pre-election spending assumptions are in purple, showing that under this plan reductions were expected to finish in 2016-17 (at which point the purple column levelled off) at 5.4 per cent of GDP. The Coalition government then announced additional austerity to 6.7 per cent of GDP. The green bits increase in size more rapidly in earlier years because the current administration were originally planning to conclude the programme a year earlier than their predecessors had been, in 2015-16.
The orange components then reflect the additional austerity that the OBR say will be required to meet the Chancellor’s fiscal goals. These followed as – unsurprisingly for some – economic outcomes fell short of what was expected. Rather than being one year shorter, the austerity programme is now two years longer. We are now pretty much exactly half way through nine planned financial years of austerity, with still just under half of the proposed pain to come.
In the meantime the alleged necessary additional austerity has been kicked into the touch of the next Parliament. Bizarrely the government still seeks to make political capital out of the failures of their policies, with increasingly prolonged austerity and permanently culled public services worn as a badge of honour.
A third chart shows where the cuts have impacted.
Plainly these are severely inequitable. By 2018-19:
- VAT will have accounted for £10.7 billion of the Coalition’s consolidation, a regressive tax that hit the poorer hardest
- ‘RDEL’ (broadly departmental spending) will have been hit by £30.7 billion, again hitting the less well-off who cannot opt out (eg to private medicine or education) harder
- Coalition policy measures reduce social security spending by £25.1 billion
Taken together these three categories account for 98 per cent of the Coalition’s consolidation. (While the Government continues to argue that its approach is fair, note that the latest ONS assessment of the distribution of income including the ‘gini’ coefficient measure extends only to 2012-13. As the IFS emphasise, the chart shows very clearly that at that point social security cuts still have a very long way to run, with only one quarter done.)
To reiterate, much of the above is to take at face value the OBR interpretation and projections, on which much more needs to be said.
In the meantime under current government proposals the course is set for more of the same, with the misery disproportionately aimed at those who can least bear it.