Risks to spending
Gemma Tetlow
@TheIFS
© Institute for Fiscal Studies
#IFSGB2016
Public spending to fall to a low level by historical
standards
25
40
20
30
15
Public services outside health to be cut
to lowest level since (at least) 1948
20
10
10
5
0
0
1948–49
1951–52
1954–55
1957–58
1960–61
1963–64
1966–67
1969–70
1972–73
1975–76
1978–79
1981–82
1984–85
1987–88
1990–91
1993–94
1996–97
1999–00
2002–03
2005–06
2008–09
2011–12
2014–15
2017–18
2020–21
% of national income
50
‘Public service spending’ (LH)
30
Pensioner benefits (RH)
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Notes and sources: see Figures 6.1 and 6.5 of The IFS Green Budget: February
2016.
% of national income
Total public spending (LH)
Gross debt interest (RH)
Working age benefits (RH)
60
Spending on public services set to see further
significant cuts
• Departmental spending by central government
– to be cut by 2.3% in real terms between 2015–16 and 2019–20
– on top of 10.4% cut already seen since 2010–11
– average cut per year (0.6%) to be slower than since 2010–11 (2.2%)
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Changes in departmental spending:
over 4 years and over 9 years
Department (ordered by size)
2015-16 to 2019-20
2010-11 to 2019-20
Health
Education
Defence
Business
Home Office
International development
Transport
Justice
-50 -40 -30 -20 -10 0 10 20 30 40 50
Real change in DEL (%)
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Notes and sources: see Table 6.1 and Figure 6.2 of The IFS Green Budget:
February 2016.
Spending on public services set to see further
significant cuts
• Departmental spending
– to be cut by 2.3% in real terms between 2015–16 and 2019–20
– on top of 10.4% cut already seen since 2010–11
– average cut per year (0.6%) to be slower than since 2010–11 (2.2%)
• Some public services also financed through locally-raised
revenues: including these revenues, cuts look smaller
– DEL+LASFE to be cut by 1.0% over next four years
– on top of 8.3% cut already seen since 2010–11
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Can these plans be delivered?
• Cuts over next 4 years significantly slower than over last 5 years
• Since 2010–11, departments have underspent their allocated
budgets
– OBR’s current borrowing forecast assumes they continue to do so
(e.g. £4 billion in 2019–20)
• Risks
– likely that cuts that were easy to identify and deliver were made first
– rising demand for public services
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Rising demand for public services
% change, 2015-16 to 2019-20
(real terms)
8
6
4
2
0
Overall
Per person
Per person (age-adjusted)
Growth in DEL+LASFE since 2010–11,
population-adjusted: –14.9%
Growth in DEL+LASFE
since 2010–11: –9.3%
-2
-4
-6
DEL+LASFE
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NHS
Notes and sources: see Table 6.2 of The IFS Green Budget: February 2016.
Can these plans be delivered?
• Cuts over next 4 years significantly slower than over last 5 years
• Since 2010–11, departments have underspent their allocated
budgets
– OBR’s current borrowing forecast assumes they continue to do so
(e.g. £4 billion in 2019–20)
• Risks
– likely that cuts that were easy to identify and deliver were made first
– rising demand for public services
– recruitment and retention of adequately motivated, sufficiently high
quality staff
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30%
Raw mean difference
Projection based on 1% pay award for four years from 2016–17
25%
20%
15%
10%
5%
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Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2016.
2020–21
2018–19
2016–17
2014–15
2012–13
2010–11
2008–09
2006–07
2004–05
2002–03
2000–01
1998–99
1996–97
0%
1994–95
Estimated gap between public and
private sector hourly pay
Squeezing public spending by holding down
public sector wages
Other risks: additional costs of employment
• In 2016–17, contracting out for defined benefit schemes ends
– increases employees’ NICs: up to £480 per year
– estimated total cost to public sector employers: £3.3 billion
• Other pressures
– National Living Wage
– apprenticeship levy
– requirement to hire apprentices
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Risks to social security spending
• Social security spending to be reduced by £9 billion in real terms
over next 5 years
– £1 billion increase in spending on pensioner benefits
– £10 billion decrease in spending on working age benefits
• Welfare cap in theory restricts upside risk on this area of spending
– breach in November 2015 suggests does not impose much constraint
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Risks to social security spending
• Social security spending to be reduced by £9 billion in real terms
over next 5 years
– £1 billion increase in spending on pensioner benefits
– £10 billion decrease in spending on working age benefits
• Welfare cap in theory restricts upside risk on this area of spending
– breach in November 2015 suggests does not impose much constraint
• Risks
– further 4-year freeze in benefit rates will reduce levels significantly in
real terms: has not been attempted in last 30 years
– further delays in transition from Disability Living Allowance to
Personal Independence Payments would increase spending
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Revisions to expected costs of disability benefits
18
17
£ billion
16
15
14
13
December 2013
12
December 2014
11
November 2015
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Notes and sources: see Figure 6.7 of The IFS Green Budget: February 2016.
2020–21
2019–20
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
10
Risks to social security spending
• Social security spending to be reduced by £9 billion in real terms
over next 5 years
– £1 billion increase in spending on pensioner benefits
– £10 billion decrease in spending on working age benefits
• Welfare cap in theory restricts upside risk on this area of spending
– breach in November 2015 suggests does not impose much constraint
• Risks
– further 4-year freeze in benefit rates will reduce levels significantly in
real terms: has not been attempted in last 30 years
– further delays in transition from Disability Living Allowance to
Personal Independence Payments would increase spending
– delays to roll out of Universal Credit have ambiguous effect on
spending: depends which aspect is delayed
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Risks to debt interest spending
• Public spending sensitive to interest rates and inflation
• 1ppt increase (reduction) in gilt and short rates (from April 2016)
– would increase (reduce) spending in 2019–20 by around £8 billion
• 1ppt increase (fall) in RPI inflation (from April 2016)
– would increase (reduce) spending in 2019–20 by around £5 billion
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Summary
• Good reasons to aim to reduce debt as a share of national income
• But commitment to deliver budget surpluses from 2019–20 risky
• Many risks to revenues, e.g.
– recent equity price falls could depress capital tax receipts by £2 billion
– manifesto commitments to cut income tax will cost £8 billion
– continued inability to index fuel duty rates would cost £3 billion
• Many risks to spending, e.g.
– further deep cuts planned to some areas of public services
– population growth & ageing will put additional pressure on services
– social security and debt interest spend could exceed current forecasts
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