Public finances: risks on tax, bigger risks
on spending?
Rowena Crawford
© Institute for Fiscal Studies
Percentage of national income
The planned consolidation
12
11
10
9
8
7
6
5
4
3
2
1
0
Other current spend
Debt interest
Benefits
We are here
Investment
4.7% (46%) done
Tax increases
10.1% tightening
planned
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
© Institute for Fiscal Studies
Notes and sources: see Figure 1.2 of The IFS Green Budget: February 2014.
Bringing tax and spend back to pre-crisis levels
Percentage of national income
55
Spending (December 2013)
Spending (no action)
Receipts (December 2013)
Receipts (no action)
50
Without
action deficit
Tax:38.3%
10.0%,
8.6%
Spend:
38.2%
larger 0.1%
than in
Surplus:
Budget 08
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
© Institute for Fiscal Studies
Notes and sources: see Figure 1.1 of The IFS Green Budget: February 2014.
100
90
80
70
60
50
40
30
20
10
0
Autumn Statement 2013
Constant primary balance
Incorporating ageing pressures
1996–97
1999–00
2002–03
2005–06
2008–09
2011–12
2014–15
2017–18
2020–21
2023–24
2026–27
2029–30
2032–33
2035–36
2038–39
2041–42
2044–45
2047–48
2050–51
2053–54
2056–57
2059–60
2062–63
Share of national income
Illustrative projections for debt
© Institute for Fiscal Studies
Notes and sources: see Figure 1.4 of The IFS Green Budget: February 2014.
How might the public finances differ under
Labour?
• “The next Labour government will balance the books and deliver a
surplus on the current budget and falling national debt in the next
Parliament”
– “How fast we can go will depend on the state of the economy and
public finances we inherit”
• Coalition planning £26 billion current budget surplus in 2018–19
• Labour could cut taxes and/or increase day-to-day spending by up
to £26 billion and meet their pledge in 2018–19
– Could also spend more on investment
• Current budget surplus less constraining than budget surplus
– Labour government might aim to over-achieve
– Trade off between benefits of higher spending/lower tax and cost of
debt falling less rapidly
© Institute for Fiscal Studies
Plenty of risks still remain
• Current forecasts are for a positive medium term picture
– Borrowing: surplus forecast for 2018–19
– Debt: on a declining path from 2015–16
• But plenty of risks still remain...
• Don’t know for sure how large a consolidation is required
• Uncertainty around recovery in tax revenues
• Probably biggest uncertainty is whether planned cuts to public
service spending can/will be implemented
– Only 37% of planned cuts to day-to-day spending on public services
done so far
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How large a fiscal consolidation is required?
• Independent forecasters disagree on the size of the ‘output gap’
– ‘Output gap’ = difference between level of national income and
potential/trend level of national income; amount of spare capacity
• Matters because it determines the division of borrowing into:
– Cyclical: Caused by economy being below potential and will disappear
as the economy recovers
– Structural: Will not just disappear as the economy recovers
• If output gap is larger than OBR currently forecast:
– → economy is further below trend
– → more of borrowing is cyclical
– → more of borrowing will disappear automatically
– → smaller consolidation required
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How large a fiscal consolidation is required?
12
% national income
10
9.9
8
5.2% needed after 2013-14
4.0% needed after 2013-14
(current plan still sufficient)
planned)
1.0% needed (5.5%
after 2013-14
(all tightening planned after
5.7
2014-15 could be scrapped)
8.6
6
4
2
0
OBR (1.8% output Pessimistic (0%
gap)
output gap)
Optimistic (6%
output gap)
Figures illustrate tightening required for structural borrowing in 2018–19 to be forecast to be the same as was
forecast for the medium term in Budget 2008 (1.2% of national income) – i.e. to offset all of the permanent
increase in structural borrowing arising from the financial crisis.
© Institute for Fiscal Studies
Notes and sources: see Table 2.1 of The IFS Green Budget: February 2014.
Risks to future tax revenues
Policy risk?
• Little future increase in revenues forecast to come from tax
increases that have yet to be implemented
– NICs increase (£4.9 billion): relatively little risk
– Anti-avoidance policies (around £2 billion): more uncertain
• Implemented policies may raise less than expected...
– E.g. Bank levy rate has needed to be increased in every Budget and
Autumn Statement under coalition (will now be more than twice that
originally intended in 2014) to raise the originally planned revenue
• Future policy action might reduce revenues...
– E.g. OBR forecasts assume that fuel duty rates will increase in line
with inflation, but coalition to date has never done this. Freezing fuel
duty rates until after 2018–19 would cost £4.2 billion
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Risks to future tax revenues
Other risks?
• Increase in receipts 2013–14 to 2018–19 driven by increases in
income tax and capital taxes
– (capital taxes = capital gains tax, inheritance tax and stamp duties)
• Are forecasts for these too optimistic?
– Forecast profiles are not out of line with the profile of these receipts
seen after the 1990s recession
© Institute for Fiscal Studies
Risks to future tax revenues
Changing composition of revenues?
100%
Share of total net taxes and NICs
90%
23.3
27.7
25.2
23.9
2.7
11.0
3.3
9.8
4.5
7.9
5.0
5.7
15.6
17.4
15.6
16.8
17.3
16.8
19.5
19.0
25.7
28.0
28.6
29.6
80%
70%
60%
50%
40%
30%
20%
10%
0%
Highest proportion of
Other
net taxes and NICs
from capital
Capital
taxes taxes
since at least 1978
Onshore corporation
tax
VAT
Increasingly coming from a
relatively
small number of
NICs
high income people
Top 1%
Income
tax contributed:
11% in 1979
21.3% in 1999-2000
27.5% in 2011-12
1989–90 1999–00 2007–08 2018–19
© Institute for Fiscal Studies
Notes and sources: see Table 2.5 of The IFS Green Budget: February 2014.
Planned cuts to spending
Debt interest
Non-debt interest spending
800
700
600
500
400
300
200
100
0
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
£ billion (2013-14 prices)
Total spending
2010‒11 to 2018‒19:
Total spending: ‒3.8% (‒£28.3bn)
Debt interest: +46.9% (+£22.5bn)
Non-debt interest: ‒7.4% (‒£50.8bn)
© Institute for Fiscal Studies
Notes and sources: see Figure 2.6 and Table 2.3 of The IFS Green Budget:
February 2014.
Non-debt interest spend
Social security + TCs
Public service spend
800
700
600
500
Total social security: +8.5% (+£17.0bn)
400
GB pensioner benefits: +11.2% (+£11.7bn)
Non-pensioner benefits: +5.6% (+£5.4bn)
300
200
100
0
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
£ billion (2013-14 prices)
Planned cuts to spending
2010‒11 to 2018‒19:
Non-debt interest: ‒7.4% (‒£50.8bn)
Social security: +8.5% (+£17.0bn)
Public services: ‒13.8% (‒£67.8bn)
© Institute for Fiscal Studies
Notes and sources: see Figure 2.6 and Table 2.3 of The IFS Green Budget:
February 2014.
Public service spend
800
700
600
500
400
300
200
100
0
Departmental
Other non-departmental spend
Departmental: ‒20.4% (‒£82.3bn)
If NHS, schools and aid ‘protected’
Other ‘unprotected’: ‒36.6% (‒£90.8bn)
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
£ billion (2013-14 prices)
Planned cuts to spending
2010‒11 to 2018‒19:
Public services: ‒13.8% (‒£67.8bn)
Departmental: ‒20.4% (‒£82.3bn)
Other non-dept.: +16.8% (+£14.6bn)
© Institute for Fiscal Studies
Notes and sources: see Figure 2.6 and Table 2.3 of The IFS Green Budget:
February 2014.
Departmental spending cuts not set in stone
• Departmental spending beyond 2015–16 not explicitly planned
– Equals planned total spending less OBR forecasts for social security
and other non-departmental spending
– => Changes in these will have implications for departmental spend
• New “welfare cap” could reduce unanticipated increases in social
security spending
• Government could choose to cut social security further
– £12 billion would reduce departmental spending cuts between 2015–
16 and 2018–19 to the same rate as over 2010–11 to 2015–16
– Cut of 17.1% between 2010–11 and 2018–19 (‘unprotected’: –31.2%)
– £12 billion equivalent to 6% of all social security spending, 11% of
non-pension spending, or 13% of spending on non-pensioners
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Are these cuts deliverable?
A reason to think yes...
• Government departments have (more than) delivered the budget
cuts required in 2011–12 and 2012–13
– Likely that political cost of over-spending means that departments
treat their budgets as a cap rather than a target
• => Suggests mechanism is there: departments look like they can
deliver the spending cuts if they are required to...
– (though this will get harder!)
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Are these cuts deliverable?
A reason to think no...
• => But would a future government want to stick to these plans
once the associated fall in service provision and/or quality
becomes more apparent?
• Large cuts to public service spending still to come
– These are likely to get harder/more painful to deliver
• The above figures also understate the squeeze on spending
– Additional spending commitments
– Demographic pressures
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Additional spending commitments
• Some policies cost (more) money beyond 2015–16
– Increased employer NICs in the public sector => £3.3 billion
– Dilnot reform to social care funding => £1.0 billion
– Tax-free childcare scheme => £0.4 billion
• Autumn Statement 2013 announced spending policies but
provided no additional funds beyond 2015-16
– Extension of free school meals (£0.8 billion)
– Abolishing HE student number cap (£0.7 billion by 2018-19)
• Need to be funded from within departmental spending =>
increases the pressure on other areas
• Adds up to £6.2 billion (around 2% of departmental spending)
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Demographic pressures
• Population increasing which increases demand for public services
– ONS projects population will grow by 5.6% (3.5 million) between
2010 and 2018
• Public service spending forecast to fall by average 1.7% per year
2010–11 to 2018–19 but spending per person to fall by 2.4%
• Population also ageing which puts particular pressure on public
services used more by older people
– ONS projects population aged 65 and over will grow by 20.0% (2.0
million) between 2010 and 2018
• For example: Real freeze in NHS spending between 2010–11 and
2018–19 would actually be a 9.1% cut in real age-adjusted NHS
spending per person
– NHS may be ‘protected’ but still considerable squeeze
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The bottom line:
40%
35%
30%
25%
20%
15%
10%
5%
0%
© Institute for Fiscal Studies
Will this be acceptable to voters
or will higher taxes, lower social
security spending or higher
borrowing be preferred?
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
Share of national income
• Public service spending reduced to the share of national income
seen at the end of the 1990s (technically: lowest since at least1948)
Summary (1/2)
• Four years through a nine year fiscal consolidation
– 4.7% out of the planned 10.1% tightening done by end 2013–14
• If the rest is implemented, and if forecasts prove correct, then
government will be running a surplus in 2018–19
• But plenty of risks (positive and negative) still remain
• Increasingly reliant on a few high income individuals for a large
proportion of tax revenue
– In 2011–12 top 1% of income tax contributors (300,000 individuals)
contributed 27.5% of income tax receipts (=7.5% of all revenues)
• Government probably going to freeze fuel duties again in future
– Freezing duties until after 2018–19 would cost £4.2 billion
© Institute for Fiscal Studies
Summary (2/2)
• Implementation of planned cuts to spending is very uncertain
• ‘Unprotected’ depts could be cut by 31.2% between 2010–11 and
2018–19 even if £12 billion further cut to social security spending
• Government still announcing additional spending priorities
– Increases the pressure on budgets by around £6 billion (2%)
• Demographic pressures mean increasing demand for services
– Eg. Real freeze in NHS spending would actually be a 9.1% real cut in
age-adjusted NHS spending per person
• Will people be happy with lower service provision/quality?
– Or would higher taxes or borrowing be preferred?
• On a brighter note, the fiscal consolidation required may still turn
out to be smaller than currently estimated
© Institute for Fiscal Studies