The UK fiscal outlook: an age of austerity
Rowena Crawford
EBEA Bank of England conference, 27th June 2012
© Institute for Fiscal Studies
Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
140
Actual GDP (Nov 2011)
Potential ("trend") GDP – November 2011
Potential ("trend") GDP – March 2008
130
13% loss
of trend
output
120
110
100
Notes and sources: see Figure 3.2 of The IFS Green Budget: February 2012.
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
80
2001–02
90
The “hole” in the public finances
Percentage of national income
55.0
Total spending (Budget 2008)
Total spending (no action)
Receipts (Budget 2008)
Receipts (no action)
50.0
45.0
40.0
35.0
Sources: Authors‟ calculations using HM Treasury and Office for Budget Responsibility figures.
(Updated version of Figure 3.6 of The IFS Green Budget: February 2012.)
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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
30.0
The “hole” in the public finances
Percentage of national income
55.0
Total spending (Budget 2008)
Total spending (no action)
Permanent
damage =
7.6% of GDP
(£115bn)
Receipts (Budget 2008)
Receipts (no action)
50.0
45.0
40.0
35.0
Sources: Authors‟ calculations using HM Treasury and Office for Budget Responsibility figures.
(Updated version of Figure 3.6 of The IFS Green Budget: February 2012.)
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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
30.0
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: No policy action
1974–75
1977–78
1980–81
1983–84
1986–87
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
2013–14
2016–17
2019–20
2022–23
2025–26
2028–29
2031–32
2034–35
2037–38
2040–41
Percentage of national income
No action would not have been sustainable
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Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
The cure (March 2012): 8.1% national income
(£123bn) consolidation over 7 years
Mar 2012: 7.6% national income (£115bn) hole in public finances
Percentage of national income
9
8
7
6
5
4
3
2
1
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
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Debt back on a more sustainable path
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: Current policy
Debt: No policy action
1974–75
1977–78
1980–81
1983–84
1986–87
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
2013–14
2016–17
2019–20
2022–23
2025–26
2028–29
2031–32
2034–35
2037–38
2040–41
Percentage of national income
- but to remain above pre-crisis levels for a generation
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Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
The cure (March 2012): 8.1% national income
(£123bn) consolidation over 7 years
Mar 2012: 7.6% national income (£115bn) hole in public finances
Percentage of national income
9
8
7
6
5
4
3
2
1
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
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The cure (March 2012): 8.1% national income
(£123bn) consolidation over 7 years
Mar 2012: 7.6% national income (£115bn) hole in public finances
Percentage of national income
9
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
83%
4
3
2
1
17%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
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Spending and revenues back to pre-crisis levels
Percentage of national income
55
Total spending (no action)
Receipts (no action)
50
45
40
35
Sources: Authors‟ calculations using HM Treasury and Office for Budget Responsibility figures.
(Updated version of Figure 3.6 of The IFS Green Budget: February 2012.)
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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
7-year squeeze on public service spending
16.2% cut
over 7 years
8.7% cut
over 7 years
10
5
0
-5
Labour
ConLib
Historic
7 year moving average
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Note: Figure shows total public spending less spending on welfare
benefits and debt interest.
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
Whitehall departments: „winners‟
37.8
International development
Energy and climate change
6.5
NHS (England)
Defence
1.0
-8.2
Average DEL cut -11.7
-20
-10
0
10
20
30
40
Real budget increase 2011–12 to 2014–15
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DEL = Departmental Expenditure Limits
Notes and sources: see Figure 5 of “The changing composition of public
spending”, IFS Briefing Note 119
Whitehall departments : „losers‟
Average DEL cut
Education
Transport
CLG: Local government
Home office
Justice
Environment, food and rural affairs
Business, innovation and skills
Culture, Media and Sport
CLG: Communities -71.3
-11.7
-11.9
-14.5
-20.7
-22.0
-27.2
-27.6
-31.2
-46.1
-80.0
-60.0
-40.0
-20.0
0.0
Real budget increase 2011–12 to 2014–15
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DEL = Departmental Expenditure Limits
Notes and sources: see Figure 5 of “The changing composition of public
spending”, IFS Briefing Note 119
Risks to the public finances
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Risks to the public finances – short term
• Lots of macro economic uncertainty
• Government may yet prove unable or unwilling to implement the
planned spending cuts
– Just under half of the real cut to spending planned between 2009-10
and 2016-17 will have been implemented by the end of 2012-13
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Can the tight spending plans be delivered?
- Have such cuts been done before?
• Such cuts to public service spending not done in the UK before
– never more than 2 consecutive years of cuts previously
– spending plans imply April 2010 to March 2017 will be the tightest 7
years for public service spending since WWII
• What about elsewhere?
– consider 29 advanced economies since (generally) 1970s
– only example of comparable cuts is Ireland: over 1987 to 1989
– lack of examples could well be because comparable cuts have not
been attempted rather than that they cannot be delivered
– other countries may do larger cuts post-crisis than the UK is
planning
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Can the tight spending plans be delivered?
- How tight will they feel?
• Cuts follow a period of big spending increases
– 12 consecutive years of real increases (1998-99 to 2009-10)
– by 2016–17 total public service spending will be the same as in
2004-05 in real terms (2000–01 as a % of national income)
• Does not imply not painful
– arguably more painful to experience 5 years of spending increases
followed by 5 years of cuts than no spending increase for 10 years
• Not necessarily those areas that saw the largest increases that
will see the largest cuts
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Can the tight spending plans be delivered?
400
350
300
250
200
Public service
spending
150
100
50
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
Real spending (1998–99 = 100)
- How tight will they feel?
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Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
400
ODA
350
Health
300
Transport
250
200
Public service
spending
150
Education
100
50
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
Real spending (1998–99 = 100)
- How tight will they feel?
Public order
and safety
Defence
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
400
ODA
350
Health
300
Transport
250
200
Public service
spending
150
Education
100
50
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
Real spending (1998–99 = 100)
- How tight will they feel?
Public order
and safety
Defence
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
400
ODA
350
Health
300
Transport
250
200
Public service
spending
150
Education
100
50
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
Real spending (1998–99 = 100)
- How tight will they feel?
Public order
and safety
Defence
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Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
30.0%
NHS
25.0%
20.0%
Education
15.0%
Defence
10.0%
Public order
and safety
5.0%
Transport
0.0%
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1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
Percentage of public service spending
No change in trends of „priorities‟
Notes and sources: see Figure 6 of “The changing composition of
public spending”, IFS Briefing Note 119
Risks to the public finances
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Sources: OBR Fiscal Sustainability Report 2011, Table 3.4
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• OBR age-related spending projections:
% of national income
2015- 2020- 2040- 206016
21
41
61
Health
7.4
7.7
9.1
9.8
Long-term care
1.2
1.3
1.8
2.0
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Sources: OBR Fiscal Sustainability Report 2011, Table 3.4
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• OBR age-related spending projections:
% of national income
2015- 2020- 2040- 206016
21
41
61
Health
7.4
7.7
9.1
9.8
Long-term care
1.2
1.3
1.8
2.0
State pensions
5.5
5.2
6.8
7.9
Pensioner benefits
1.0
1.0
1.2
1.2
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Sources: OBR Fiscal Sustainability Report 2011, Table 3.4
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• OBR age-related spending projections:
% of national income
2015- 2020- 2040- 206016
21
41
61
Health
7.4
7.7
9.1
9.8
Long-term care
1.2
1.3
1.8
2.0
State pensions
5.5
5.2
6.8
7.9
Pensioner benefits
1.0
1.0
1.2
1.2
Public service pensions
2.0
1.9
1.6
1.4
Education
5.0
5.1
5.0
5.0
Total age-related spending
22.0
22.1
25.6
27.3
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Sources: OBR Fiscal Sustainability Report 2011, Table 3.4
Percentage of national income
Projected effect of demographics on debt
120.0
Baseline
100.0
Including effects of demographics
80.0
60.0
40.0
20.0
0.0
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Sources: OBR Fiscal Sustainability Report 2011, Chart 3.8
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• Government faces 3 choices:
– Increase taxes to pay for increased spending
– Keep total spending fixed but reduce spending elsewhere
– Reduce spending on age-related components to offset LR pressures
© Institute for Fiscal Studies
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• Government faces 3 choices:
– Increase taxes to pay for increased spending
• Taxes would need to increase by ~5.4% of national income
– Keep total spending fixed but reduce spending elsewhere
– Reduce spending on age-related components to offset LR pressures
© Institute for Fiscal Studies
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• Government faces 3 choices:
– Increase taxes to pay for increased spending
• Taxes would need to increase by ~5.4% of national income
– Keep total spending fixed but reduce spending elsewhere
• Non age-related spending and benefits would have to fall from ~40% of noninterest spending to ~25%
– Reduce spending on age-related components to offset LR pressures
© Institute for Fiscal Studies
Risks to the public finances – longer term
• Demographic changes put upward pressure on spending
• Government faces 3 choices:
– Increase taxes to pay for increased spending
• Taxes would need to increase by ~5.4% of national income
– Keep total spending fixed but reduce spending elsewhere
• Non age-related spending and benefits would have to fall from ~40% of noninterest spending to ~25%
– Reduce spending on age-related components to offset LR pressures
• Difficult
• Cannot postpone these choices indefinitely
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Conclusions
• Permanent hit to public finances from financial crisis estimated at
£115 billion a year (in today‟s terms)
• Response is a £123 billion fiscal tightening by 2016–17
• Seven years from April 2010 imply the tightest seven-year squeeze
on „public service‟ spending since at least end of Second World War
• Borrowing forecasts are very uncertain
• Delivery of planned spending cuts is one of the main risks
– Such cuts are unprecedented in the UK
– Only half of the real reduction in spending planned between 2009-10
and 2016-17 will have been implemented by the end of 2012-13
• Even if plans to 2015-16 implemented, not out of the woods yet
– Demographic pressures loom and will need to be addressed soon
© Institute for Fiscal Studies
The UK fiscal outlook: an age of austerity
Rowena Crawford
EBEA Bank of England conference, 27th June 2012
© Institute for Fiscal Studies