Prospects for public sector finances: the
squeeze on spending continues
Gemma Tetlow
Presentation to the CIPFA Pensions Network CFO Briefing
24 November 2014, London
© Institute for Fiscal Studies
Overview of the public finance situation
• Financial crisis and recession revealed large structural deficit
– Necessitated active policy response to reduce borrowing from a postWorld War II high of 10.2% of GDP
• Roughly halfway through a large fiscal consolidation
– Budget plans imply deep spending cuts through to 2018–19 in order to
eliminate the deficit in that year
– Spending cuts and tax rises have largely been implemented as planned
so far but weak growth has meant deficit has not fallen as forecast in
2010
• Parties differ somewhat in their objectives for reducing borrowing
– None have given much detail about how this will be achieved
• Potential developments in the Autumn Statement
– Tax revenues have been weaker than forecast so far this year, despite
growth turning out largely as expected
– Is this a temporary or permanent phenomenon?
© Institute for Fiscal Studies
Spending and revenues, without action
Public sector receipts and total managed expenditure, 1997 to 2018
% of national income
55
50
45
40
35
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
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Spending and revenues, without action
Public sector receipts and total managed expenditure, 1997 to 2018
55
% of national income
Revenues - without action
Spending - without action
50
45
40
35
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
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
12% from tax rises
8% from investment spending cuts
14% from welfare spending cuts
52% from other current spending
The policy response
March 2014: 8.8% national income (£152bn) hole in public finances,
offset by 10.3% national income (£178bn) consolidation over 9 years
% of national income
12
Other current spend
10
Debt interest
8
Benefit spend
6
Investment spend
4
Tax
2
0
© Institute for Fiscal Studies
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
-2
Spending and revenues, with action
Now aiming for tighter
fiscal position than
planned pre-crisis
Public sector receipts and total managed expenditure, 1997 to 2018
% of national income
55
50
Revenues - without action
Spending - without action
Revenues - with action
Spending - with action
45
40
35
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
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Spending and revenues, with action
Implies tax burden
slightly above pre-crisis
level and at 30 year high
Public sector receipts and total managed expenditure, 1997 to 2018
% of national income
55
50
Revenues - without action
Spending - without action
Revenues - with action
Spending - with action
45
40
35
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
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Spending and revenues, with action
Implies total spending
back to 2002 levels,
but….
Public sector receipts and total managed expenditure, 1997 to 2018
% of national income
55
50
Revenues - without action
Spending - without action
Revenues - with action
Spending - with action
45
40
35
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
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
… high spending on social security and debt
interest implies relatively little for public services
40
35
30
25
20
15
10
5
0
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
% of national income
• Public service spending reduced to the share of national income
seen at the end of the 1990s (technically: lowest since at least
1948)
© Institute for Fiscal Studies
Note: Figure shows total public spending less spending on social security benefits
and debt interest.
Public sector net borrowing
(£ billion)
Deficit reduction: have they stuck to the plan?
180
160
140
120
100
80
60
40
20
0
-20
March 2014 Budget (old basis)
March 2014 Budget (new basis)
June 2010 Budget (old basis)
Financial year
© Institute for Fiscal Studies
Source: Office for National Statistics and Office for Budget Responsibility.
Originally planned tax increases and spending
cuts delivered but more announced...
12
% of national income
Budget 2014
Budget June 2010
10
8
6
4
2
0
© Institute for Fiscal Studies
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
-2
Planned cuts to public spending
Based on current plans from Budget 2014:
Between 2010–11 and 2018–19 and after economy-wide inflation
• Total spending cuts of 5%
• But
– debt interest spending rising
– social security spending, particularly on pensioners, rising
– other non-departmental spending such as on PAYG spending on
public service pensions and UK contribution to the EU budget rising
• Departmental spending on public services to be cut by 20%
© Institute for Fiscal Studies
Whitehall departments: ‘winners’
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
International Development
35.3
Energy and Climate Change
9.4
NHS (Health)
4.3
Transport
-7.4
Education
-8.2
Defence
-10.4
Total DEL
-11.0
-80
-60
-40
-20
0
20
40
Real budget increase 2010–11 to 2015–16
© Institute for Fiscal Studies
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Whitehall departments: ‘losers’
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
Total DEL
-11.0
Business, Innovation and Skills
-19.1
CLG Local Government
-28.4
Home Office
-28.8
Environment, Food and Rural…
-30.3
Culture, Media and Sport
-33.4
Justice
-35.3
Work and Pensions
-35.4
CLG Communities
-59.5
-80
-60
-40
-20
0
20
40
Real budget increase 2010–11 to 2015–16
© Institute for Fiscal Studies
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Departmental spending cuts not set in stone (1)
• Detailed plans for spending in 2015–16 set out in Spending
Review 2013
– Conservatives, Labour and Liberal Democrats have all said they
would stick to these levels of (current) spending
• 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 spending
© Institute for Fiscal Studies
Departmental spending cuts not set in stone (2)
• 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 to DEL of 17% between 2010–11 and 2018–19
– If NHS, schools and aid remain protected from cuts then
‘unprotected’ areas would face cuts averaging 31%
– £12 billion equivalent to 6% of all social security spending, 11% of
non-pension spending, or 13% of spending on non-pensioners
• Could choose to have a higher level of total spending
– Labour and Liberal Democrats have suggested they would be happy
with a higher level of borrowing than currently planned for
– Could spend around £26 billion a year more by 2018–19 and still
achieve their suggested deficit targets
– Cut to DEL of 13% between 2010–11 and 2018–19
© Institute for Fiscal Studies
Are these cuts deliverable?
A reason to think yes...
• Government departments have (more than) delivered the budget
cuts required in 2010–11, 2011–12, 2012–13 and 2013–14
– 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!)
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
Additional spending commitments with no, or
only temporary, additional funding
• Budget 2013
– Ending contracting out into DB pensions increases public sector
employer NICs (£3.3 billion a year)
– Dilnot reform to social care funding (£1.0 billion)
– Tax-free childcare scheme (£0.8 billion)
• Autumn Statement 2013
– Extension of free school meals (£0.8 billion)
– Scrapping cap on HE student numbers (£0.7 billion)
– Energy prices and efficiency measures (£0.4 billion)
• Budget 2014
– Higher contributions to public service pensions (£1 billion)
• Adds up to £8 billion (around 2% of departmental spending) to be
found from within departmental spending
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
Demographic pressure on the NHS budget
102
Indexed real terms spending
2010–11 = 100
100
5.6% drop in
per-capita
9.1%
drop inreal
spending age
per-capita
98
96
adjusted real
spending
94
NHS spending
92
...per person
90
...per age-adjusted person
88
© Institute for Fiscal Studies
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
86
Summary
• Financial crisis and recession revealed large structural deficit
– Necessitated active policy response to reduce borrowing from a postWorld War II high of 10.2% of GDP
• Roughly halfway through a large fiscal consolidation
– Budget plans imply deep spending cuts through to 2018–19 in order to
eliminate the deficit in that year
– Spending cuts and tax rises have largely been implemented as planned
so far but weak growth has meant deficit has not fallen as forecast in
2010
• Parties differ somewhat in their objectives for reducing borrowing
– None have given much detail about how this will be achieved
• Potential developments in the Autumn Statement
– Tax revenues have been weaker than forecast so far this year, despite
growth turning out largely as expected
– Is this a temporary or permanent phenomenon?
© Institute for Fiscal Studies
Prospects for public sector finances: the
squeeze on spending continues
Gemma Tetlow
Presentation to the CIPFA Pensions Network CFO Briefing
24 November 2014, London
© Institute for Fiscal Studies