George Osborne. Photo by Oli Scarff
The real story of the Autumn Statement: the OBR tell the Chancellor to think again
Many are already reporting today’s Autumn Statement in terms of the immediate changes to stamp duty and air travel. But the big headlines were not in the Chancellor’s speech. It’s the OBR’s chilling analysis of the spending cuts that are set to come that should be the real story of today’s announcements.
The OBR have produced an unusually critical economic forecast, setting out in no uncertain terms the risks that the Chancellor is running and the scale of the damage his strategy could cause our public services.
Key finding from their analysis – all drawn from their executive summary – are:
The scale of planned post-election spending cuts is severe.
The OBR say:
Between 2009-10 and 2019-20, spending on public services, administration and grants by central government is projected to fall from 21.2 per cent to 12.6 per cent of GDP and from £5,650 to £3,880 per head in 2014-15 prices. Around 40 per cent of these cuts would have been delivered during this Parliament, with around 60 per cent to come during the next. The implied squeeze on local authority spending is similarly severe.
Total public spending is now projected to fall to 35.2 per cent of GDP in 2019-20, taking it below the previous post-war lows reached in 1957-58 and 1999-00 to what would probably be its lowest level in 80 years.
The Chancellor is not spreading the pain, spending cuts are playing the most significant role in deficit reduction and of the tax rises he’s introduced, it’s the most regressive which are making the largest contribution.
The OBR say:
Just over 80 per cent of the reduction is accounted for by lower public spending. Just under 20 per cent of the drop in borrowing is accounted for by higher receipts, with the majority having taken place by 2012-13, largely as result of rises in the standard rate of VAT.
Despite all these cuts, the Chancellor has failed to meet his original fiscal targets (to have closed the structural deficit over a parliament and to have debt falling as a proportion of GDP) and it is also highly questionable whether his new plan can be delivered.
The OBR say:
On the Government’s latest plans and medium-term assumptions, we are now in the fifth year of what is projected to be a 10-year fiscal consolidation.
It remains on course to miss its supplementary target, to have net debt falling as a share of GDP in 2015-16.
On our best estimate of a like-for-like basis, borrowing is expected to be higher in the initial years of the forecast and slightly lower from 2016-17 than we thought in March. The largest single-year effect of a Government decision comes via its new assumption for total spending in 2019/20, although this does not appear in the Treasury’s table of policy decisions. This implies another cut in current spending by central government departments in that year equivalent to £14.5 billion.
Wage growth has been poor, which has affected income tax revenues, and will recover more slowly than was previously expected. Growth is expected to slow after the election in 2015. In part, this will be because of the scale of government cuts, which also bring real economic risks. Although employment has held up better than expected public sector job cuts in the years ahead will be severe.
The OBR say:
Lower wage growth has reduced our income tax forecast.
We still expect the economy to lose momentum through 2015 – and by a little more than we thought in March – thanks to weaker external demand and the expectation that consumer spending growth will slow to rates more in line with growth in people’s incomes.
The Government’s fiscal plans imply three successive years of cash reductions in government consumption of goods and services from 2016 onwards, the first since 1948. The corresponding real cuts directly reduce GDP. The economy should be able to adjust to such changes over time, but it is unlikely to be a simple process when monetary policy is already very loose and external demand subdued.
Over the course of the next Parliament, we project that government employment will fall by 1.0 million, compared to the 0.4 million decline that we are likely to have seen over this Parliament.
There is more damning analysis on the state of the economy in the body of the report – not least the OBR’s conclusion that real wages will not even be back to their pre-recession peak within five years (as opposed to household debt which is well on track to surpass it’s previous highs).
But the most striking point I have taken from today’s analysis (notwithstanding the poor future UK economic prospects the OBR has set out) is the strength of their implied critique of the Chancellor’s approach – which you don’t have to go beyond their executive summary to understand.