Our fiscal future
Paul Johnson
© Institute for Fiscal Studies
Our fiscal future
• The spending review period and medium term outlook
• The long term outlook
© Institute for Fiscal Studies
The hole in the public finances
Percentage of national income
55.0
Permanent
damage =
7.5% of GDP
(£114bn)
Total spending (Budget 2008)
Receipts (Budget 2008)
50.0
45.0
40.0
35.0
© Institute for Fiscal Studies
Notes and sources: see Figure 3.6 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
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
30.0
The cure (November 2011):
8.1% national income consolidation over 7 years
Nov 2011: 7.5% national income (£114bn) hole in public finances
Percentage of national income
9
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
80%
4
3
2
1
20%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
© Institute for Fiscal Studies
Notes and sources: see Figure 3.5 of The IFS Green Budget: February 2012.
Spending and revenues brought back to precrisis levels
Percentage of national income
55.0
Total spending (Budget 2008)
Receipts (Budget 2008)
Receipts (no action)
Total spending (no action)
50.0
45.0
40.0
35.0
© Institute for Fiscal Studies
Notes and sources: see Figure 3.6 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
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
30.0
7-year
6-year squeeze on public service spending
16.2% cut
over 7 years
9.3% cut
over 7 years
10
5
0
ConLib
Historic
1980–81
Labour
1970–71
-5
7 year moving average
© Institute for Fiscal Studies
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
1975–76
1965–66
1960–61
1955–56
-10
1950–51
Annual percentage real increase
15
Pattern of DEL changes 2010-11 to 2014-15
International Development
37.8%
Energy and Climate Change
6.5%
NHS (England)
1.0%
Defence
-8.2%
Education
-11.9%
Total
-11.5%
Transport
-14.5%
CLG: Local Government
-20.7%
Home Office
-22.0%
Justice
-27.2%
Environment, Food and Rural Affairs
-27.6%
Business, Innovation and Skills
-31.2%
Culture, Media and Sport
CLG: Communities
-100%
-46.1%
-71.3%
-80%
-60%
-40%
-20%
0%
Percentage real increase, 2010–11 to 2014–15
© Institute for Fiscal Studies
20%
40%
230
210
Health
190
170
150
Public service
spending
130
110
90
Education
70
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)
Similar priorities (in different directions)
Defence
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Household incomes falling to unprecedented degree
Median net household income (indexed to
2009=100)
100
99
98
97
96
95
94
93
92
91
90
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Sources: Department for Work and Pensions’ HBAI series; IFS calculations and projections using Family Resources Survey.
© Institute for Fiscal Studies
2015-16
Continuing change in the shape of the state
• Health, social protection and education account for
two thirds of public spending
• Up from less than half in 1979
• Increase results from health and social protection
– Education has merely maintained its share
• Defence, housing and support for business and
industry have taken the strain
© Institute for Fiscal Studies
Public spending in 2010-11
Social protection
10%
1%
3%
Personal social services
29%
2%
Health
Education
6%
Transport
Defence
5%
Public order and safety
Gross debt interest
6%
4%
3%
Housing
TIEEE
AFF
13%
© Institute for Fiscal Studies
18%
Other
Public spending in 1978-79
Social security
9%
1%
Personal social services
23%
Health
9%
Education
Transport
6%
2%
Defence
Law, order & protection
10%
10%
Gross debt interest
Housing
TIEEE
4%
12%
10%
© Institute for Fiscal Studies
4%
AFFF
Other
Going forward state is set to change further
• Demographics will drive further change
• OBR projections suggest that health and pensions
alone could account for more than a half of noninterest spending by 2060
© Institute for Fiscal Studies
Going forward state is set to change further
• Demographics will drive further change
• OBR projections suggest that health and pensions
alone could account for more than a half of noninterest spending by 2060
• And there are additional pressures on tax receipts
– Notably on petrol and from north sea oil
– Perhaps from corporation tax
© Institute for Fiscal Studies
This creates some major pressures
• At least another £100 billion in tax rises or spending
cuts will need to be found over a – relatively long –
period from 2020
• Three core drivers:
– Demographics
– Structure of spending commitments
– Stability of tax base
© Institute for Fiscal Studies
This creates some major pressures
• At least another £100 billion in tax rises or spending
cuts will need to be found over a – relatively long –
period from 2020
• Three core drivers:
– Demographics
– Structure of spending commitments
– Stability of tax base
• There are only three choices:
– Increase total taxes to accommodate pressures
– Reform and rein in health and pension spending
– Cut other areas of spending
© Institute for Fiscal Studies
Conclusions
• £114 billion hole in public finances
• Planned fiscal consolidation: 8.1% of national income
– Most of the spending cuts are still to come
• Long term squeeze on household incomes
– Real increases in energy prices a big issue for those on
low incomes
• The longer term outlook is daunting too
– Continued move to the “welfare state” offers challenges
– Main sources of “environmental” taxation are falling
© Institute for Fiscal Studies