health will be relatively protected while defence and public order and safety will see significant cuts


the risk that government borrowing rates rise sharply. There is clearly a trade-off here and Mr Osborne has made very clear where he stands on that trade-off: he puts a great deal of weight on the risks of losing credibility and facing higher borrowing costs. The opposition appear to put more weight on the risks to the economy of a speedy tightening. There is another risk associated with the


speed of the tightening though, and that is one associated with the other big choice made by the Chancellor – the choice to weight the tightening very much towards spending cuts as opposed to tax increases. About 80 per cent of the overall squeeze is planned to come through spending cuts. The justification for this is that much of the big increase in the deficit arose because when the economy shrank spending grew rapidly as a share of national income. By 2016-17 public service spending is planned


to be as high in real (inflation adjusted) terms as it was in 2004-05 and at the same level as a proportion of national income as it was in 2000-01. But that doesn’t change the fact that the planned real cut of 16.2 per cent in public service spending between April 2010 and March 2017 is nearly twice as big as the previous biggest seven-year fall (between 1975 and 1982) seen in the UK since the second world war. And seven consecutive years of cuts is wholly unprecedented. The truth is we are in uncharted territory.


Neither we nor the government can know what the political and social consequences of these cuts will be. In terms of our analysis for the Green Budget, three further points stand out. First, while most of the planned tax increases have already happened, the cuts in non-investment


public service spending have barely begun. The pain is mostly still to come. Second, the pain will not be evenly shared across the public services. On the whole those areas of spending, particularly health, which did well in the preceding decade will be relatively protected. And some of those, such as defence and public order and safety which did less well will see significant cuts. So in some ways the current plans continue a long-term reshaping of the state with growing focus on health and welfare. Third, longer term demographic pressures mean that more hard choices remain just around the corner. The pressure on health and pension spending will increase inexorably over the coming decades and a further set of fiscal choices on a similar scale to those we are currently experiencing will need to be made, albeit over a longer timescale. One thing is clear. The speed with which the cuts were announced, their currently unknown effects, the need to specify what plans are after 2015 and the long-term pressures, all point to the need for a serious review of spending decisions by the Autumn of 2013. This review should look at what is known of the composition and consequences of the cuts. It should take account of long-term pressures. And it should fill in at least some of the details for 2015-16 and 2016-17. n


i


Paul Johnson is Director of the Institute for Fiscal Studies (IFS)


The IFS Green Budget was produced in collaboration with Oxford Economics with additional funding from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy


For more information see www.ifs.org.uk/publications/6003


Email mailbox@ifs.org.uk Tel 020 7291 4800 Web www.ifs.org.uk


SPRING 2012 SOCIETY NOW 23


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