The third most important thing that
happened yesterday?
Carl Emmerson
© Institute for Fiscal Studies
IFS hosts two ESRC Research Centres
Faster growth in GDP – but only temporary
Comparison of forecasts for real GDP growth and trend GDP
Level of GDP
(Index, actual 2009–10 GDP = 100)
120
118
116
114
GDP (Mar 2013)
GDP (Dec 2013)
Potential ("trend") GDP - March 2013
Potential ("trend") GDP - December 2013
112
110
108
106
104
102
100
© Institute for Fiscal Studies
Sources: OBR; Author’s calculations.
Changes in borrowing forecasts since March 2013
Public sector net borrowing, £ billion
2012–
13
2013–
14
2014–
15
2015–
16
2016–
17
2017–
18
2018–
19
Budget 2013
120.9
119.8
108.4
95.5
67.0
42.7
–
AS 2013
115.0
111.2
96.0
78.7
51.1
23.4
–2.2
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since March 2013
Public sector net borrowing, £ billion
2012–
13
2013–
14
2014–
15
2015–
16
2016–
17
2017–
18
2018–
19
120.9
119.8
108.4
95.5
67.0
42.7
–
Tax
–4.3
–3.4
–9.6
–13.2
–14.5
–14.6
Spend
–1.6
–3.2
–2.9
–3.7
–1.8
–5.3
115.0
111.2
96.0
78.7
51.1
23.4
Budget 2013
Forecasting changes
AS 2013
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
–2.2
Changes in borrowing forecasts since March 2013
Public sector net borrowing, £ billion
2012–
13
2013–
14
2014–
15
2015–
16
2016–
17
2017–
18
2018–
19
120.9
119.8
108.4
95.5
67.0
42.7
–
Tax
–4.3
–3.4
–9.6
–13.2
–14.5
–14.6
Spend
–1.6
–3.2
–2.9
–3.7
–1.8
–5.3
Tax
–3.0
–3.0
–2.5
–3.1
–4.7
Spend
3.0
3.0
2.5
3.1
4.7
111.2
96.0
78.7
51.1
23.4
Budget 2013
Forecasting changes
Neutral switch
AS 2013
© Institute for Fiscal Studies
115.0
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
–2.2
Changes in borrowing forecasts since March 2013
Public sector net borrowing, £ billion
2012–
13
2013–
14
2014–
15
2015–
16
2016–
17
2017–
18
2018–
19
120.9
119.8
108.4
95.5
67.0
42.7
–
Tax
–4.3
–3.4
–9.6
–13.2
–14.5
–14.6
Spend
–1.6
–3.2
–2.9
–3.7
–1.8
–5.3
Tax
–3.0
–3.0
–2.5
–3.1
–4.7
Spend
3.0
3.0
2.5
3.1
4.7
Tax
–0.0
+0.1
–0.5
+0.4
+0.6
Spend
–2.0
+0.0
+0.6
0.0
0.0
111.2
96.0
78.7
51.1
23.4
Budget 2013
Forecasting changes
Neutral switch
Measures
AS 2013
© Institute for Fiscal Studies
115.0
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
–2.2
Changes in borrowing forecasts since March 2013
Public sector net borrowing, £ billion
2012–
13
2013–
14
2014–
15
2015–
16
2016–
17
2017–
18
2018–
19
120.9
119.8
108.4
95.5
67.0
42.7
–
Tax
–4.3
–3.4
–9.6
–13.2
–14.5
–14.6
Spend
–1.6
–3.2
–2.9
–3.7
–1.8
–5.3
Tax
–3.0
–3.0
–2.5
–3.1
–4.7
Spend
3.0
3.0
2.5
3.1
4.7
Tax
–0.0
+0.1
–0.5
+0.4
+0.6
+0.9
Spend
–2.0
+0.0
+0.6
0.0
0.0
–20.7
111.2
96.0
78.7
51.1
23.4
–2.2
Budget 2013
Forecasting changes
Neutral switch
Measures
AS 2013
© Institute for Fiscal Studies
115.0
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
The cure (December 2013): 10.1% national
income consolidation over 9 years (£166bn)
Dec 2013: 8.6% national income (£141bn) hole in public finances
11
Other current spend
Debt interest
Benefits
Investment
Tax increases
Percentage of national income
10
9
8
7
6
46% done
5
86%
4
3
2
1
0
2010–112011–122012–132013–142014–152015–162016–172017–182018–19
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
Spending and revenues over time
Percentage of national income
55
Total spending
Receipts
50
45
40
35
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
2018–19
30
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Note: Figures exclude Royal Mail Pension Plan and Asset Purchase Facility transfers.
Source: ONS; OBR; Author’s calculations.
A freeze on total spending, but annually managed
spending forecast to rise
Real change in
2018–19:
£ billion (2013–14 prices)
800
700
Total public spending
600
AME
0.0%
500
400
+2.8%
300
200
100
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
2018–19
0
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 are adjusted for changes for local
government funding for Business Rates Retention.
Absent further AME cuts, departmental budgets
to keep falling
Real change in
2018–19:
£ billion (2013–14 prices)
800
Total public spending
700
0.0%
AME
600
500
400
+2.8%
300
200
100
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
2018–19
0
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 are adjusted for changes for local
government funding for Business Rates Retention.
Absent further AME cuts, departmental budgets
to keep falling
Real change in
2018–19:
£ billion (2013–14 prices)
800
Total public spending
AME
DEL
700
600
0.0%
500
400
+2.8%
‒3.1%
300
200
130,000 fall in general
government employment
in 2018–19
100
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
2018–19
0
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 are adjusted for changes for local
government funding for Business Rates Retention.
Absent further AME cuts, departmental budgets
to keep falling
£ billion (2013–14 prices)
800
Total public spending
AME
DEL
700
600
500
400
300
10.6% cumulative fall over three years
from April 2016
200
100
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
2018–19
0
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 are adjusted for changes for local
government funding for Business Rates Retention.
Absent further AME cuts, departmental budgets
to keep falling
£ billion (2013–14 prices)
800
Total public spending
AME
DEL
700
600
500
400
300
20.5% cumulative fall since 2010–11,
1.1 million fall in general government
employment
200
100
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
2018–19
0
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 are adjusted for changes for local
government funding for Business Rates Retention.
Other pressures within DEL to bear in mind
Existing policies that cost money in 2016–17 onwards:
• Ending contracting out into DB pensions increases public sector
employer NICs (£3.7bn a year)
• Dilnot reforms to social care funding (£1.0bn per year)
• New tax-free childcare scheme (£0.8bn per year)
Autumn Statement announced new policies for which money is
available up to 2015–16 but not beyond:
• Free school meals extension (£0.8bn in 2015–16)
• Scrapping cap on HE student numbers (£0.3bn in 2015–16,
increasing to £0.7bn in 2018–19 and further thereafter)
• Energy prices and efficiency (£0.3bn + £0.1bn in 2015–16)
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Without further benefit cuts, plans for total spending
imply historically low public service spending
% of national income
50
General
Government
Consumption
40
Total public
spending
30
... Less social
security & debt
interest
20
... Less investment
Financial year
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2015–16
2018–19
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1980–81
1975–76
1970–71
1965–66
1960–61
1955–56
1948–49
10
Departmental spending beyond 2015–16
• DELs being cut by an average of 2.3% a year over the five years
from April 2011 to March 2016
• Without further AME cuts the DEL cuts would accelerate to 3.7%
a year over the three years from April 2016 to March 2019
• To reduce the DEL cut to 2.3% a year would require a further
£12bn cut (in today’s terms) to social security spending (or other
AME) by 2018–19
• Compares to the estimated £25bn cut by 2018–19 from measures
already announced by Mr Osborne
• Would still imply cumulative cut to DELs from April 2011 to
March 2019 of 17.1%
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Capping social security spending
• Budget to set cap for future spending on “welfare in scope”
– social security and tax credit spending less state pension, JSA and JSA
passported housing benefit
• OBR to assess compliance with the cap in each Autumn Statement
– debate and vote in parliament needed to change cap or exceed it
• If welfare spending risen undesirably then forcing an active decision
could lead to better policy making
• Could reduce risk in the public finances, but increase income risk
faced by benefit recipients
• Better to review all spending frequently regardless of whether higher
or lower than forecast, or at least cap individual components
– proposed new annual OBR report on trends and drivers in welfare in
scope spending could help with this
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Strengthening the long run public finances?
• Chancellor re-iterated intention to increase the SPA
– Pensions Bill already going through parliament plans to introduce reviews
of the SPA every five years
– confirmed principle that “people should expect to spend up to a third of
their adult life in retirement”
• Long-run public finance projections suggest further adjustment is
needed and increasing SPA is a coherent response to rising longevity
• Scrapping cap on student numbers will increase long run cost to the
public finances of student loans
– (costly because subsidised interest rate and not all loans repaid)
– Treasury estimates around £0.7bn a year
– “The new loans will be financed by selling the old student loan book”:
economically nonsense as selling an asset for what it is worth does not
strengthen the public finances
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Conclusions
• Latest forecasts suggest underlying health of economy and public
finances little changed since Budget
• New policy measures have little impact on borrowing through to
2017–18, further significant squeeze on spending pencilled in for
2018–19
• Budget surplus forecast for 2018–19 and debt to fall faster
• Under current policies over the three years from April 2016
– Annually Managed Expenditure forecast to rise
– 10.6% additional cut to departmental spending required
– significant additional pressures on spending not accounted for
• Forecasts imply historically low levels of spending on public services
in 2018–19
– is this realistic, or might it imply either less deficit reduction or a
combination of further net tax rises or benefit cuts?
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