Prospects for public spending
Carl Emmerson
Presentation at Economics National Teachers' Conference: The UK
Economy, London, 20 th 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
© Institute for Fiscal Studies
Notes and sources: see Figure 3.2 of The IFS Green Budget: February 2012 .

Weak short-term growth thought to reflect a permanent problem
Comparison of forecasts for real GDP growth and trend GDP
© Institute for Fiscal Studies
Notes and sources: see Figure 3.2 of The IFS Green Budget: February 2012 .

Weak short-term growth thought to reflect a permanent problem
Comparison of forecasts for real GDP growth and trend GDP
13% loss of trend output
© Institute for Fiscal Studies
Notes and sources: see Figure 3.2 of The IFS Green Budget: February 2012 .

The big fiscal picture
55
Total spending (no action)
50
45
40
35
30
Receipts (no action)
© Institute for Fiscal Studies

The cure (March 2012): 8.1% national income consolidation over 7 years (£123bn)
Mar 2012: 7.6% national income (£115bn) hole in public finances
9
8
7
6
5
4
3
2
1
0
2010 –11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
© Institute for Fiscal Studies

Debt back on a more sustainable path
- but to remain above pre-crisis levels for a generation
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: No policy action
Debt: Current policy
Debt: Current policy – incl. estimated impact of ageing
© Institute for Fiscal Studies
Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012 .

The cure (March 2012): 8.1% national income consolidation over 7 years (£123bn)
Mar 2012: 7.6% national income (£115bn) hole in public finances
9
8
7
6
5
4
3
2
1
0
Other current spend
Debt interest
Benefits
Investment
Tax increases
83%
17%
2010 –11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
© Institute for Fiscal Studies

Forecasts for fiscal aggregates broadly unchanged
© Institute for Fiscal Studies

The pain to come
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
75%
27%
88%
66%
88%
94%
All fiscal tightening
Tax increases
Total spending cuts
Investment cuts
Benefit cuts
Other current spending cuts
© Institute for Fiscal Studies
Source: Author’s calculations using Figure 3.5 of
The IFS Green Budget: February 2012 .

Can the tight spending plans be delivered?
• 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
• Only comparable international experience is Ireland in late 1980s
• On the other hand 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)
© Institute for Fiscal Studies

7-year squeeze on public service spending
15
10
9.3% cut over 7 years
16.2% cut over 7 years
5
0
-5
-10
Labour ConLib Historic 7 year moving average
© Institute for Fiscal Studies Note: Figure shows total public spending less spending on welfare benefits and debt interest.

Whitehall departments: ‘winners’
International development
Energy and climate change
Work and pensions
NHS (England)
Defence -7.8
Education -11.4
Average DEL cut -11.7
-0.2
0.9
15.5
33.4
-20 -10 0 10 20 30
Real budget increase 2011 –12 to 2014–15
40
© Institute for Fiscal Studies
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011 .

Whitehall departments : ‘losers’
© Institute for Fiscal Studies
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011 .

Whitehall departments : ‘losers’
© Institute for Fiscal Studies
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011 .

Can the tight spending plans be delivered?
- How tight will they feel?
© 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?
- How tight will they feel?
© 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?
- How tight will they feel?
© 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?
- How tight will they feel?
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012 .

Trade-off between cuts to public service spending and welfare cuts: 2015 –16 and 2016–17
-1
-2
1
0
-3
-4
-5
-25
No RDEL cut,
£20bn welfare cut
RDEL cut by 2.3% a year, £8bn welfare cut
RDEL cut by 3.8% a year, no welfare cut
-20 -15 -10 -5 0
Change in welfare spending (£bn, 2011 –12 terms)
(or change in taxation or borrowing)
© Institute for Fiscal Studies
Note: HM Treasury and IFS calculations. Resource Departmental Expenditure
Limits (RDEL) is the non-investment component of the spending by central government on the delivery and administration of public services.
5

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
• Spending Review 2010 plans imply:
– overseas aid budget increased sharply
– in England: NHS and schools relatively protected; deep cuts to: social housing, grant to local government and higher education institutions
• Details for cuts in 2015 –16 and 2016–17 in the next Spending Review
– this should happen no later than autumn 2013
– if cuts to central government spending on public services to continue at same rate then £8bn more of welfare cuts needed
© Institute for Fiscal Studies

Prospects for public spending
Carl Emmerson
Presentation at Economics National Teachers' Conference: The UK
Economy, London, 20 th June 2012
© Institute for Fiscal Studies