Fiscal challenges in the next parliament
Paul Johnson
© Institute for Fiscal Studies
Where have we got to on the deficit?
• Deficit reached £157 billion in 2009-10
– 11% of GDP
• Down to £108 billion in 2013-14 and expected to be at £95 billion
this year
– 5.5% of GDP
• £70 billion of that deficit is judged to be structural
• Debt at 75% of GDP and still rising
– 90% on Maastricht Treaty definitions
• There is a long way still to go
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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
5.1% (49%) done
Tax increases
10.3% tightening
planned
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19
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Notes and sources: IFS calculations based on Budgets and Autumn
Statements since 2008. Consistent with Budget 2014.
Bringing tax and spend back to pre-crisis levels
Percentage of national income
55
Spending (March 2014)
Receipts (March 2014)
50
Tax:38.1%
Spend: 37.8%
Surplus: 0.2%
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: Excluding Royal Mail and APF transfers.
Source: ONS; OBR.
Departmental cuts to 2015-16
Total DEL
International Development
Energy and Climate Change
NHS (Health)
Transport
Education
Defence
Cabinet Office
Business, Innovation and Skills
Chancellor's Departments
CLG Local Government
Home Office
Environment, Food and Rural Affairs
Law Officers' Departments
Culture, Media and Sport
Justice
Work and Pensions
Foreign and Commonwealth Office
CLG Communities
-11.0
2010-11 to 2014-15
2014-15 to 2015-16
4.3
-7.4
-8.2
-10.4
-11.1
-19.1
-21.8
-28.4
-28.8
-30.3
-31.7
-33.4
-35.3
-35.4
-51.5
-59.5
-80
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9.4
-60
-40
-20
0
20
40
Real budget increase 2010–11 to 2015–16 (%)
Note: Figures show cumulative change in total DEL after economy-wide inflation.
Adjusted for consistency, including for business rate retention policy,
movement of cost of operations into the special reserve, financial transactions
associated with ‘Right to Buy’ policy, and the Green Investment Bank.
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: ‒4.4% (‒£32.6bn)
Debt interest: +42.7% (+£20.7bn)
Non-debt interest: ‒7.8% (‒£53.3bn)
Source: Chapter 2 of IFS Green Budget: February 2014. Additional
authors’ calculations using data from HM Treasury and Office for Budget
Responsibility.
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Non-debt interest spending
Social security + TCs
Public service spending
800
700
600
500
Total social security: +7.4% (+£14.8bn)
400
GB pensioner benefits: +11.1% (+£11.6bn)
Other benefits: +3.0% (+£2.8bn)
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: ‒7.8% (‒£53.3bn)
Social security: +7.4% (+£14.8bn)
Public services: ‒14.0% (‒£68.1bn)
Source: Chapter 2 of IFS Green Budget: February 2014. Additional
authors’ calculations using data from HM Treasury, Office for Budget
Responsibility and DWP 2014 benefit expenditure tables.
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Public service spend
800
700
600
500
400
300
200
100
0
Departmental
Other non-departmental spend
Departmental: ‒19.9% (‒£80.0bn)
If NHS, schools and aid ‘protected’
Other ‘unprotected’: ‒36.0% (‒£89.1bn)
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: ‒14.0% (‒£68.1bn)
Departmental: ‒19.9% (‒£80.0bn)
Other non-dept.: +14.1% (+£11.9bn)
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Source: Chapter 2 of IFS Green Budget: February 2014. Additional
authors’ calculations using data from HM Treasury, Office for Budget
Responsibility and DWP 2014 benefit expenditure tables.
This would take public service spending to an
historic low
Share of national income
40%
35%
30%
25%
20%
15%
10%
5%
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
0%
Will this be acceptable to
voters or will higher taxes,
lower social security spending
or higher borrowing be
preferred?
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Government has suggested cutting social
security further
• £12 billion cut mooted
– This 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% between 2010–11 and 2018–19
– Unprotected cut by 31%
• £12 billion equivalent to
– 6% of all social security spending
– 11% of non-pension spending,
– 13% of spending on non-pensioners
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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 £28 billion current budget surplus in 2018–19
• Labour could cut taxes and/or increase day-to-day spending by
up to £28 billion and meet their pledge in 2018–19
– Could mean average departmental spending cuts of 2.4% rather
than 10% between 2015-16 and 2018-19
• Trade off between benefits of higher spending/lower tax and
higher borrowing and debt
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Debt path under different scenarios
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Leaving four unpleasant options
• Very big additional cuts to public service spending, taking
spending to lowest levels since 1948
• Slightly less big cuts on public services, but substantial cuts to
social security
• Smaller cuts to spending, but more to do to get debt under
control later on
• Substantial tax rises
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