2015–16: the squeeze continues
Carl Emmerson
Presentation for IFS and IfG background briefing on “The 2015–16
Spending Round”, Friday 7 June 2013, IfG, London.
Available at http://www.ifs.org.uk/projects/418 (with bonus slides)
© Institute for Fiscal Studies
Introduction
• The Government’s deficit reduction plan and how 2015–16 fits
within this
• The cuts planned under the last spending review (2011–12 to
2014–15) and those implied by the plans for 2016–17 & 2017–18
• What the 2015–16 spending round might mean for individual
departments
• Outlook for public sector pay and employment
© Institute for Fiscal Studies
Deficit to fall from post WW2 peak
Percentage of national income
15
PSNB
Cyclically-adjusted PSNB
10
5
0
-5
Notes: Data prior to 1955–56 are calendar rather than financial year. Data
© Institute for Fiscal Studies exclude Royal Mail and APF transfers.
Source: ONS; OBR.
2015–16
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1980–81
1975–76
1970–71
1965–66
1960–61
1955–56
1950
-10
Disease and cure
Mar 2013: 8.6% national income (£133bn) hole in public finances,
offset by 9.1% national income (£141bn) consolidation over 8 years
10
9
8
7
6
5
4
3
2
1
0
-1
Percentage of national income
Other current spend
Debt interest
Benefits
Investment
Tax increases
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
© Institute for Fiscal Studies
Notes: Figures include realised underspends by government departments and
latest estimate of Exchequer savings from changing to CPI indexation.
Source: Tetlow (2013).
Aggregate impact of measures largely as planned
in SR2010 in this parliament ...
Percentage of national income
Change in discretionary policy and delivered spending plans, between
November 2010 Autumn Statement and March 2013 Budget
10
Tax increases
9
Investment
8
Benefits
7
Other current spend
6
Total
5
4
3
2
1
0
-1
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
© Institute for Fiscal Studies
Notes: Figures include realised underspends by government departments.
Source: Author’s calculations.
... but greater fiscal tightening pencilled in for the
next parliament
Percentage of national income
Change in discretionary policy, and delivered spending plans, between
November 2010 Autumn Statement and March 2013 Budget
10
Tax increases
9
Investment
8
Benefits
7
Other current spend
6
Total
5
4
3
2
1
0
-1
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
© Institute for Fiscal Studies
Notes: Figures include realised underspends by government departments.
Source: Author’s calculations.
International comparison
UK compared to 29 other advanced economies
• Deficit
– 3rd highest deficit pre-crisis (2007)
– 9th largest increase over the crisis
– 6th largest projected fall to 2018
• Tax and spend
– 17th highest spending and 21st highest tax pre-crisis
– 11th largest rise in spending and 17th largest fall in tax over the crisis
– 5th largest projected cut to spending and 14th largest projected rise in
tax to 2018
Source: Author’s calculations using data in Table STA-T1 and STA-T3, IMF,
Fiscal Monitor: April 2013.
© Institute for Fiscal Studies
7–year 8–year
6–year squeeze on public service spending
15.8% cut
over 8 years
9.2% cut
over 2 years
10
5
0
-5
Labour
ConLib
Historic
© Institute for Fiscal Studies
Note: Figure shows total public spending less spending on net social benefits
and public sector net debt interest. Data exclude 3G and 4G spectrum sales
and Royal Mail pension transfer.
2015–16
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1980–81
1975–76
1970–71
1965–66
1960–61
1955–56
-10
1950–51
Annual percentage real increase
15
1992–93
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
Percentage of national income
Public Sector Net Investment
4.0%
3.5%
Budget March 2010
3.0%
Budget 2013
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
© Institute for Fiscal Studies
The outlook for DEL and AME
£ billion (2012–13 prices)
800
Total public spending
AME
DEL
700
600
500
400
300
200
100
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 adjusted for changes for local government
funding for Business Rates Retention and Council Tax Benefit localisation.
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
0
Managing Annually Managed Expenditure?
• DEL should not include unpredictable/uncontrollable spending
– failure of the pre-1992 spending regime was to allow a boost to
structural spending to be hidden by falling cyclical spending in the late
1980s boom
• AME not subject to firm limits so departments may not face the
same incentive to manage it as with their cash limited DEL spending
• Cap on working age social security spending could help force active
decisions over how best to manage this spending
• But frequent and regular reviews should consider all – both rising
and falling – components of public spending
© Institute for Fiscal Studies
Departmental spending: SR2013 and beyond
Real DEL spending (2010–11 = 100)
120
Spending Review 2010 period
110
'Unchanged policy' projections
100
–8.9%
–9.1%
–11.7%
90
80
–18.4%
–2.8%
70
–7.6%
Will be allocated between
departments in 2013
Spending Round
60
Will be allocated between
departments after next
election
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 adjusted for changes for local government
funding for Business Rates Retention and Council Tax Benefit localisation.
2017-18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
50
Departmental spending: 2010–11 to 2017–18
• Current plans imply cuts of
– 18.4% to total DEL over 7 years from April 2011, with just under half
done over the first 4 years
– 2.8% to be implemented in 2015–16
– further 7.6% to occur over 2016–17 and 2017–18
• Budget 2013: “Fiscal consolidation for 2016–17 and 2017–18 is
expressed as a reduction in TME. It would, of course, be possible
to do more of this further consolidation through tax instead”
– implied DEL cuts over these years equivalent to £23bn in today’s
terms
– cutting DEL at the same rate as planned over SR2010 years would
require £9bn of tax rises/welfare cuts (or other cuts to AME) or higher
borrowing in 2017–18
– further tax rises and/or welfare cuts after next election?
© Institute for Fiscal Studies
Central government sharing the cuts unevenly...
International Development
NHS (Health)
Transport
Energy and Climate Change
Defence
Education
Total DEL
Work and Pensions
Business, Innovation and Skills
Home Office
Environment, Food and Rural Affairs
CLG Local Government
Justice
Culture, Media and Sport
CLG Communities
Foreign and Commonwealth Office
-80
27.9
4.2
-1.1
-3.2
-7.0
-7.2
-9.1
-21.8
-22.9
-23.5
-25.6
-26.6
-27.3
-34.7
-44.0
-50.5
-60
-40
-20
0
20
Real budget increase 2010–11 to 2014–15
© Institute for Fiscal Studies
Note: Figures show cumulative change in total DEL after economy-wide inflation.
40
... some front-loaded and some back-loaded
International Development
NHS (Health)
Transport
Energy and Climate Change
Defence
Education
Total DEL
Work and Pensions
Business, Innovation and Skills
Home Office
Environment, Food and Rural Affairs
CLG Local Government
Justice
Culture, Media and Sport
CLG Communities
Foreign and Commonwealth Office
-80
Done
To do
-60
-40
-20
0
20
Real budget increase 2010–11 to 2014–15
© Institute for Fiscal Studies
Note: Figures show cumulative change in total DEL after economy-wide inflation.
40
(English) local government cuts
• Income from council tax means that cuts to local authority grants
overstate cut to spending power of local authorities
– by 2014–15 the spending power of English local authorities projected to
be 12.2% below 2010–11 levels
• Significant variation in size of these cuts across the country
– councils relatively more reliant on grant income typically seeing larger
cuts to their spending power
– a quarter of areas to see cuts of more than 15.7%, larger average cuts in
London and other metropolitan areas than in shire England
• Over 2011–12 and 2012–13 cuts by local authorities have fallen
unevenly across different service areas
– fire services and social care not cut, environmental services and police
spending relatively protected
– on average cultural & related services cut by 20%, planning &
development services cut by 46%
© Institute for Fiscal Studies
The 2015–16 Spending Round (1/3)
• Budget 2013 set the total spending envelope for 2015–16, given
OBR forecast for non-departmental spending:
– implied total DEL to be cut in real terms by £9.8 billion or 2.8%, with
resource DEL being cut by 2.7% (£8.4bn) and capital DEL by 3.3%
(£1.4bn)
– over SR2010 years total DEL is forecast to be cut by an average of
2.4% a year: to cut at this rate would require an extra £1 billion from
welfare spending/other non-departmental spending
• Note the widely quoted £11.5bn cuts to resource DEL number
differs from the £8.4bn stated above since the latter
– is in current terms
– includes the OBR’s projected 2014–15 underspend
– excludes £1.5bn of cuts already scored in 2014–15
© Institute for Fiscal Studies
The 2015–16 Spending Round (2/3)
• “Health, schools and Official Development Assistance will be
protected”
– setting the reserve at £3½bn and the Barnett consequences of these
protections would mean average cut of around 8% elsewhere
– protecting defence from cuts too would increase this to 10%
• Settlements claimed with 7 departments
– Ministry of Justice, Communities, Treasury, Energy & Climate
Change, Cabinet Office, Foreign & Commonwealth Office, Northern
Ireland Office
– actual settlements not published: average cuts of around 8% would
not change picture for other departments
• Do-It-Yourself spending round spreadsheet available online for
you to make your own allocations
– http://www.ifs.org.uk/ff/spending_review2013.xlsm
© Institute for Fiscal Studies
The 2015–16 Spending Round (3/3)
• Assume: NHS, schools and overseas aid protected, 7 early settlers
see resource DELs cut by an average of around 8%, capital cuts
shared equally and reserve set at £3.5bn
• If other resource DELs cut in proportion to SR2010 then:
Defence & Home Office
–2%
–4%
–6%
Local government
Business, Innovation and Skills
Transport
DEFRA
DCMS
© Institute for Fiscal Studies
Source: Author’s calculations using http://www.ifs.org.uk/ff/spending_review2013.xlsm
The 2015–16 Spending Round (3/3)
• Assume: NHS, schools and overseas aid protected, 7 early settlers
see resource DELs cut by an average of around 8%, capital cuts
shared equally and reserve set at £3.5bn
• If other resource DELs cut in proportion to SR2010 then:
Defence & Home Office
–2%
–4%
–6%
Local government
–12%
–11%
–10%
Business, Innovation and Skills
–11%
–10%
–9%
Transport
–9%
–8%
–8%
DEFRA
–12%
–11%
–10%
DCMS
–12%
–11%
–10%
• These are cuts to total DEL: cuts relative to an adjusted baseline
could look different
© Institute for Fiscal Studies
Source: Author’s calculations using http://www.ifs.org.uk/ff/spending_review2013.xlsm
Public sector pay
• Budget 2013 extended 1% average public sector pay increase to
2015–16
– lower than projected economy-wide inflation (1.8%), CPI inflation
(2.1%) and average earnings growth (3.8%)
– central government paybill in 2014–15 projected (in summer 2012) to be
£94.5bn and this is currently just over half of general government paybill
– pay falling by 0.8% relative to economy-wide inflation cuts real DEL by
around £1bn to £1½bn
© Institute for Fiscal Studies
Public-private pay differentials to return to precrisis levels around 2015–16?
Change in public-private pay differential relative to 2007–08
3.2
3
Forecast
2.3
2.2
1.8
1.8
2
1.0
1
0
Estimated
0.1
0.0
-0.1
-1
-1.1
-2
-2.3
© Institute for Fiscal Studies
Notes: Data to 2012–13 estimated using LFS data. Forecasts take OBR forecasts
for whole economy earnings growth and for public sector pay per head, but
adjust for the 2015–16 public sector pay squeeze announced in Budget 2013.
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
-3
2017–18
Change since 2007–08 (ppt)
4
Public sector employment
• 410,000 fewer public sector workers in Dec. 2012 than in Dec. 2010
• OBR March 2013 forecast that between 2010–11 and 2017–18
general government employment to fall by 1 million
• But
– departments plan to cut paybill faster to 2014–15 than OBR assumes:
implies a fall of 150,000 more than forecast by OBR by 2017–18, rising
to 250,000 if paybill trend persists
– 2015–16 public sector pay policy not incorporated into the OBR’s
forecast: likely to boost employment by around 30,000
© Institute for Fiscal Studies
Conclusions
• Average real DEL cut in 2015–16 projected at 2.8%
– unprotected departments could see planned cuts averaging 8%
– some departments could see a cut to their total budget of 10%
between 2014–15 and 2015–16?
• Significant cuts have been delivered with more to come
– rising AME leaves total spending broadly flat in real terms
– 2015–16 cuts on top of those in last Spending Review: some
unprotected departments cut by 30%+ since 2010–11
– two further years of cuts pencilled into the Government’s plans
• Public sector pay squeeze to 2015–16 on course to restore pay
relative to private sector to pre-crisis levels
– further squeezes to public sector pay beyond 2015–16 might be
likely but would inevitably become harder to deliver
© Institute for Fiscal Studies
2015–16: the squeeze continues
Carl Emmerson
Presentation for IFS and IfG background briefing on “The 2015–16
Spending Round”, Friday 7 June 2013, IfG, London.
Available at http://www.ifs.org.uk/projects/418 (with bonus slides)
© Institute for Fiscal Studies
IFS references
• Crawford, R. (2013), “Do It Yourself Spending Round Spreadsheet”
http://www.ifs.org.uk/ff/spending_review2013.xlsm
• Crawford, R. (2013), “Spending Review 2013 and beyond”
http://www.ifs.org.uk/publications/6652
• Crawford, R. Cribb, J. & Sibieta, L. (2013) “Public spending, public
sector employment and public sector pay”
http://www.ifs.org.uk/budgets/gb2013/GB2013_Ch6.pdf
• Crawford, R. Emmerson, C. Phillips, D. & Tetlow, G. (2011) “Public
spending cuts: pain shared?”
http://www.ifs.org.uk/budgets/gb2011/11chap6.pdf
• Crawford, R. & Johnson, P. (2013), “The rapidly changing state”
http://www.ifs.org.uk/publications/6642
• Tetlow, G. (2013) “Cutting the deficit: three years down, five to go?”
http://www.ifs.org.uk/publications/6683
© Institute for Fiscal Studies
Spending and revenues back to pre-crisis levels
Percentage of national income
55
Total spending (no action)
TME (March 2013)
Receipts (no action)
Receipts (March 2013)
50
45
40
35
© Institute for Fiscal Studies
Note: Spending in 2012–13 exclude Royal Mail transfer.
Source: ONS; OBR; Tetlow (2013).
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
30
© Institute for Fiscal Studies
OBR March 2013
OBR December
2012
OBR Budget 2012
OBR November
2011
OBR Budget 2011
OBR November
2010
Size of the problem
OBR Budget June
2010
HMT Budget
March 2010
HMT PBR 2009
HMT Budget 2009
10
HMT PBR 2008
HMT Budget 2008
Percentage of national income
The hole in the public finances has increased
Planned fiscal consolidation
9
8
7
6
5
4
3
2
1
0
Departmental spending relative to
budget (£bn)
Departments have been underspending
0
-2
-4
-4.1
-6
-4.3
-5.3
-6.4
-8
-10
-10.9
-12
2008–09
© Institute for Fiscal Studies
2009–10
2010–11
2011–12
Note: Spending relative to ‘final’ plans up to 2010–11, and relative to PESA
plans after 2011–12.
Source: OBR March 2013 EFO Fiscal Supplementary Tables Table 2.15.
2012–13
Cutting the deficit?
£ billion
180
160
140
120
100
80
60
Budget March 2010
Autumn Statement 2010
Budget 2013
40
20
© Institute for Fiscal Studies
Note: Data exclude Royal Mail and APF transfers.
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
0
International comparison: tax, spend and borrow
Comparison of IMF forecasts for the UK and 29 other advanced
economies show:
UK rank
Tax
Spend
Borrow
Pre-crisis (2007)
21st highest
17th highest
3rd highest
Peak/trough
19th highest
16th highest
4th highest
2018
19th highest
20th highest
8th highest
Pre-crisis (2007)-peak/trough
17th largest fall
11th largest rise
9th largest rise
Peak/trough-2018
14th largest rise
5th largest cut
6th largest cut
2007-2018
14th largest rise
9th largest cut
6th largest cut
Level
Change
Source: Table STA-T1 and STA-T3, IMF, Fiscal Monitor: April 2013.
© Institute for Fiscal Studies
The outlook for spending
% of national income
50
Total public spending
AME
DEL
40
30
20
10
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 adjusted for changes for local government
funding for Business Rates Retention and Council Tax Benefit localisation.
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
0
Variation in local authority cuts across England]
Percentage change in spending
power April 2011 to March 2015
Change in spending power (grants and council tax revenue) among
English local authorities between April 2011 and March 2015
Shire
Unitary
London Metropolitan
All
0
-2
-4
Median
-6
p75
-8
p25
-10
-12
-14
-16
-18
-20
Notes: Spending power aggregated to the levels of local government shown in
© Institute for Fiscal Studies the Figure. Excludes spending by the GLA and fire authorities.
Source: Author’s calculations using data from DCLG.
LAs sharing the cuts unevenly (so far)
0.0
Fire and rescue services
-0.4
Social care
-2.0
Environmental and regulatory services
Police services
-4.2
All
-5.6
Highways and transport services
-6.5
-9.8
Other & central
-19.6
Cultural and related services
-45.7
Planning and development services
-80
-60
-40
-20
0
20
Real budget increase 2010–11 to 2012–13
© Institute for Fiscal Studies
Source: Author’s calculations using data from DCLG.
40
Beyond SR 2013: Trade off between DEL cuts and
other policy action
Tax increase or social security spending
cut, £ billion (2012–13 terms)
40
Total DEL
35
‘Unprotected DEL’
30
25
No real cuts to total DEL:
£23 billion policy action
20
‘Unprotected’ DEL cut at
same rate as over SR2010:
£8 billion policy action
15
10
Total DEL cut at same rate as over SR2010:
£9 billion policy action
5
0
-5
No new tax rise or social
security cuts: 14.5%
‘unprotected’ DEL cut
-10
-15%
-10%
No new tax rise or social security cuts:
7.6% total DEL cut
-5%
0%
Real change in departmental spending, 2015–16 to 2017–18
© Institute for Fiscal Studies
5%
1999 Mar
1999 Sep
2000 Mar
2000 Sep
2001 Mar
2001 Sep
2002 Mar
2002 Sep
2003 Mar
2003 Sep
2004 Mar
2004 Sep
2005 Mar
2005 Sep
2006 Mar
2006 Sep
2007 Mar
2007 Sep
2008 Mar
2008 Sep
2009 Mar
2009 Sep
2010 Mar
2010 Sep
2011 Mar
2011 Sep
2012 Mar
2012 Sep
Private sector employees (million)
24.0
7.0
23.5
6.5
23.0
6.0
22.5
5.5
22.0
5.0
21.5
© Institute for Fiscal Studies
Private sector (LH axis)
Public sector (RH axis)
21.0
Note: To aid comparison all financial sector workers are attributed to the private
sector for the whole period.
Source: ONS.
4.5
4.0
Public sector employees (million)
Employment
© Institute for Fiscal Studies
2016–17
2012–13
2008–09
2004–05
2000–01
1996–97
1992–93
1988–89
1984–85
1980–81
1976–77
1972–73
1968–69
1964–65
1960–61
1956–57
25%
1952–53
1948–49
Percentage of total public spending
The changing composition of public spending
35%
Soc. sec: all
30%
Soc. sec: pensioners
Soc. sec: working age
20%
15%
10%
5%
0%
© Institute for Fiscal Studies
2016–17
2012–13
2008–09
2004–05
2000–01
1996–97
1992–93
1988–89
1984–85
1980–81
Soc. sec: all
Education
Defence
1976–77
1972–73
1968–69
25%
1964–65
30%
1960–61
35%
1956–57
1952–53
1948–49
Percentage of total public spending
The changing composition of public spending
Health
Debt interest
20%
15%
10%
5%
0%
35%
Soc. sec: all
Soc. sec: pensioners
Education
Defence
30%
25%
Health
Soc. sec: working age
Debt interest
20%
15%
10%
5%
© Institute for Fiscal Studies
2016–17
2012–13
2008–09
2004–05
2000–01
1996–97
1992–93
1988–89
1984–85
1980–81
1976–77
1972–73
1968–69
1964–65
1960–61
1956–57
1952–53
0%
1948–49
Percentage of total public spending
The changing composition of public spending