The 2015 Dilemma (Revised Edition)

Two reports on the public finances were published at the weekend. These things usually come out during the week but both the Institute for Fiscal Studies and the Resolution Foundation had to squeeze their press releases into the couple of days after the Scottish referendum result (which would have thrown everything up in the air) and before the party conferences.

Both papers look at the spending plans of the three main parties as they have been outlined so far. All parties say they will eliminate the deficit by the end of the next parliament. The only differences are how quickly they will do so and which definition of the deficit they use.

Broadly speaking, the main difference is that the Conservatives say they will eliminate the entire deficit by 2018-19 whereas Labour and the Liberal Democrats aim to eliminate the deficit on day-to-day spending but continue to borrow for capital investment.

As the Resolution Foundation says, working out what that means in practice is quite difficult:

Assessing precisely what is implied by these differing plans depends on a number of unknown policy details (as well as inevitable economic uncertainty). It is not possible based on current information to say anything definitive about the differences between these plans. But by way of adding to the debate, we can establish a number of indicative scenarios based on what we think are plausible interpretations of these different approaches. As more information is provided these scenarios will obviously change. Taking this speculative approach, the main options and trade-offs are set out in the chart below.

In other words, the longer you take to reduce the deficit, the fewer public service and welfare cuts you have to make by 2018-19 but the more you have to borrow or raise taxes.

These different scenarios – all highly speculative – clearly have differing implications for the size and shape of the state in 2018-19. They also involve different trade-offs. One the one hand, more gradual trajectories clearly have the advantage of reducing the immediate burden on public services and on households. But that choice comes at a price. Other things being equal, faster approaches will bring the stock of debt down more quickly therefore reducing the share of government funds allocated to debt interest payments as well as leaving the economy better placed to absorb future shocks and pressures.

Based on the OBR numbers, both the IFS and the Resolution Foundation came up with a similar figure for the shortfall. To avoid any more cuts to social security or public service spending, or any additional borrowing, the next government will need an extra £37 billion a year. Unless that is raised in tax, the government will have to borrow more or cut more during the next parliament.

So far, all three parties have been fairly quiet about tax, apart from the odd promise that won’t actually raise much money. The difference between the main parties, therefore, is not cuts or no cuts but how deep the cuts should be and over what period. It all means more austerity, it’s just that the blend is different.

Beyond that, there isn’t much detail. As the IFS says:

For all the main UK parties, based on the latest official forecasts for the economy and public finances, achieving their fiscal targets will require further tax increases, or cuts to welfare spending or public services in the next parliament. None of the parties have yet provided the electorate with full details of these tough choices.

Even what little detail there isn’t very plausible. For example, George Osborne’s £12 billion of welfare cuts, highlighted on the Resolution Foundation’s graph, looks to me like a big Chinny Reckon.

It’s unlikely that the next government, whoever is running it, will be able to eliminate the deficit without tax increases. Welfare cuts wouldn’t save much and so the cuts to public services would just be too big unless a major reduction in state provision is planned. It’s also nigh on impossible to rise these extra taxes just from the rich, which is perhaps why politicians are so reluctant to talk about it.

So far, then, the parties stated plans give us a flavour of what might happen but not much detail. The projections from the IFS and Resolution Foundation tell us that there will certainly me more cuts and there will probably be extra borrowing. Most probably, there will also be extra tax increases.

The 2015 dilemma remains, as ever, the about the trade-off between them.

The 2015 Dilemma (Revised)