FEATURE FUTURE SHOCK


Future shock T


HE PUBLIC FINANCES remain in a far less healthy state than was planned by this stage back in 2010 when the coalition government came to power. The


government is still spending about five per cent of national income more than it raises in revenue, and public sector net debt is set to peak at over 80 per cent of national income. This slower-than-planned deficit reduction is largely due to the poor performance of the economy at the start of this parliament, rather than any failure to implement the set of planned tax rises and spending cuts. Since the original tax and spending plans were laid out by the Chancellor back in 2010, growth has turned out lower than expected. This means lower tax receipts and more social security spending.


“ So far there has been much less


discussion among politicians of tax increases than of benefit cuts The growth we have had has also been less


‘tax-rich’ than was expected. For example, it has comprised more employment but lower earnings for those employed: we estimate that this different composition alone has cost the Exchequer £6.5 billion per year. The Chancellor has responded to this


”


unexpected weakness by pencilling in further policy action – almost entirely in the form of spending cuts – after the coming election; hence increasing the duration of the fiscal consolidation, rather than increasing its intensity over the current parliament. In fact real spending cuts have been substantially less than originally planned over this parliament, because inflation has turned out lower while the cash-terms spending plans have not been reduced. The result of all this is that difficult choices still


lie ahead. Some countries have so far implemented much bigger austerity packages than the UK, but the UK is currently planning the largest fiscal consolidation out of 32 advanced economies over the period from 2015 to 2019. Virtually all of this – according to the December Autumn Statement plans – is to come from spending cuts. If these plans were implemented we would see real cuts of 14.1 per cent to departmental spending between 2015-16 and 2019-20. This would come on top of the substantial cut (9.5 per cent) that has already


18 SOCIETY NOW SPRING 2015


Lower than expected growth means public finances are in a less healthy state than was planned when the current government came to power. The General Election winner will face difficult choices to reduce the deficit and public sector debt. By Robert Joyce


been made to departmental budgets between 2010- 11 and 2015-16 and could lead to public spending falling to its lowest share of national income since at least 1948. Further cuts will surely be harder to make, given that so much of the lowest-hanging fruit has presumably been picked off already. However, we are in a slightly odd situation.


The three main UK political parties could each cut spending by less than is implied by the Autumn Statement plans and still meet their fiscal targets, and we might consider that to be a better guide to what will actually happen. Importantly, the differences between the parties here are substantial. If they implement the tax cuts and £12 billion cut to social security that they have suggested, to meet their target of budget balance the Conservatives would need to reduce departmental spending after 2015-16 by 6.7 per cent – not the 9.5 per cent implied by the Autumn Statement plans. Labour and the Liberal Democrats would need to impose departmental spending cuts of much less – 1.4 per cent and 2.1 per cent respectively – to be consistent with their fiscal targets and stated intentions on tax and benefit policy. Smaller spending cuts are easier to deliver than


larger spending cuts, but of course there is a trade- off. Continuing with Labour’s target (to borrow only for investment) over the 2020s would result in debt falling by nine percentage points of GDP, compared to a 19 percentage point fall under the Conservatives’ proposal for overall budget balance. Higher debt means more spending on debt interest and potentially greater vulnerability to any future adverse shock.


A future government could also ease the pressure on departments – without requiring


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32