The Institute of Fiscal Studies released its Green Budget this week. I looks pretty grim. Two and a half years on from its 2010 spending review, the government’s assumptions about deficit reduction have proved to be way wide of the mark. About £64 billion wide, say the IFS, which is the amount on top of his original estimates that George Osborne will be borrowing by the next election.
The reason for this is simple. There has been no economic growth, tax revenues have barely increased and benefit spending has continued to rise. Until both figures move in the opposite direction, the Chancellor will have to keep borrowing.
Even the more upbeat growth forecasts don’t give much comfort. In the periods after previous recessions, economic growth averaged about 3 percent per year, with the odd 4 or 5 percenter powering us out of the doldrums.
This is not like previous recessions. It is very unlikely, at least in the near future, that we will see the big growth spurts which got us out of trouble in the past.
Given the continuing deficit and lack of growth, by the time of the next election, the IFS reckons public debt will be around 80 percent of GDP. This poisoned chalice will be handed to the next government.
It won’t get any better either as the rising costs of an ageing population put more pressure on the public finances. The result being that the next government will either have to raise taxes, increase borrowing or cut welfare and public services. The IFS estimates that, after the next election, taxes will either have to rise by the equivalent of 3p on the basic rate of income tax, or unprotected departments’ spending (those outside the NHS, Education and foreign aid) will have to reduce by a third from 2010 levels. This would bring the total public sector job losses to 1.2 million.
IFS director, Paul Johnson, said:
We shouldn’t lose our sense of shock and awe with some of these numbers, they are all of them pretty much historically unprecedented and particularly some of these spending cuts look very, very hard to deliver. If they are delivered, not only will they result in extraordinary levels of cuts across public services, they’ll also change very dramatically the shape of the state that is delivering them.
It means that a few political sacred cows will have to be slaughtered. The left can’t have more welfare and public services. It won’t even be able to reverse the loathed Tory cuts. The right can’t have tax cuts; it will have to swallow tax increases instead. Whichever party wins the next election, most of its members won’t like what it has to do. Neither, for that matter, will the voters.
Whatever the politicians say, though, it is their duty manage the changing shape of the state, otherwise it will just fall apart of its own accord. The IFS is not usually given to hyperbole. When someone as measured and understated as Paul Johnson talks about unprecedented cuts, it’s serious. Cuts of 30 percent will see some services disappearing by default. Public bodies will continue to provide those services that were, at some point, defined as statutory obligations, plus the ones demanded by those who shout the loudest, and everything else will be quietly dropped.
At the moment, we still base our assumptions about the size and shape of the state on the high growth economy of the last half of the Twentieth Century. But what should the state look like in an ageing, low-growth society? What should its priorities be and what should it stop doing? We have barely started the debate.
Unless there is a radical re-think, or a miraculous discovery of some extra cash, by the end of this decade, some public services will just collapse, or be hastily scrapped without much thought. People, most of whom have grown up taking these services for granted, will be confused and outraged. Without a strategy for re-shaping the state we will just be left with the shock and awe.