IFS GREEN BUDGET
The long road ahead O
NLY 40 PER CENT of the Chancellor’s planned spending cuts will be in place by the end of this financial year – with 60 per cent yet to come, according to the Institute for Fiscal Studies (IFS). The Institute, which is core-funded by the ESRC, publishes the Green Budget annually as an analysis of the UK’s fiscal situation and available options for the Chancellor’s Budget. This year the IFS outlined the tough challenge of reducing the deficit. The planned cuts would amount to more than
30 per cent in the ‘unprotected’ public service budgets since 2010 – even with £12 billion a year of additional cuts to social security spending, the report points out. These daunting figures do not tell the whole
story and additional challenges lie ahead that will affect how cuts will be made over the coming years. For example, the Government has already
committed to £6 billion a year in additional spending after 2015-16, so to fund this spending it is likely even more cuts will need to be made in some areas.
“ The government is increasingly
relying on a small group of very rich taxpayers to balance the books Public service spending per person is set to
fall by 2.4 per cent a year. Even though the overall fall is set to be less than this (at 1.7 per cent), the population is estimated to increase by 3.5 million from 2010 to 2018 – leaving less available to spend per person. And the population is getting older, with people aged 65 and over estimated to increase by two million in the same period. This means greater demands on the NHS, and, again, less to spend per person – nine per cent lower in 2018-19 than in 2010-11, when adjusted for age. On the revenues side, the IFS researchers find that government is becoming increasingly reliant on the three main taxes – income tax, VAT and National Insurance contributions – which will account for two thirds of all revenue by 2018-19. With this reliance come risks. The government’s revenue forecasts assume that fuel duties rise each year with inflation from September 2015 onwards but if, as recent history suggests,
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this does not happen, the government would need to make up £4.2 billion a year by 2018-19. Further significant increases in the income tax personal allowance would also be expensive. The government is also increasingly relying on a small group of very rich taxpayers to balance the books. The share of income tax paid by the top one per cent of taxpayers rose from 11 per cent in 1979 to 27.5 per cent in 2011–12. The income tax alone paid by these 300,000 very high-income individuals accounts for 7.5 per cent of all tax revenue and they will also pay a large fraction of VAT and capital taxes. And much of the expected increase in
underlying revenues over the next few years is projected to come from growth in capital taxes, which are notoriously difficult to forecast. “Returning growth, and forecasts suggesting we should be running a Budget surplus by 2018- 19, should not lull us into a false sense that all is now well with the public finances,” cautions IFS Director Paul Johnson. “The outstanding debt will still be very large and the scale of additional spending cuts required to hit that budget surplus remains hugely challenging, especially on top of cuts already delivered. A combination of significant additional spending pledges already made and a growing and ageing population will only add to the challenge.” n
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The ESRC funds the Centre for Microeconomic Analysis of Public Policy and the Centre for Microdata Methods and Practice at the IFS. To download a copy of the IFS Green budget see:
www.ifs.org.uk/pr/Green_Budget2014.pdf
SPRING 2014 SOCIETY NOW 13
The Chancellor’s decision to extend the fiscal consolidation through to 2018-19 means even more dramatic spending cuts are now planned, despite the better headline economic news. The IFS Green Budget outlined the tough challenge of reducing the deficit.
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