Media reactions to the OBR’s Fiscal Sustainability Report were ‘gibberish’ says Ben Chu. Yes, he says, we would need spending cuts or tax rises of £19bn after 2018 to get the public debt down to 40 percent of GDP in 50 years time. But to suggest we need to do it all at once is just hysterical hyperbole.
What the OBR projected was that from 2017-18 the state would run a budget surplus (before debt interest payments) for twenty years and the national debt would gradually decline to around 70 per cent of GDP.
The budget surplus is shown here as “primary balance”. The national debt is “PSND” (public sector net debt):
Only thereafter in the mid-2030s would the cost pressures of an ageing population begin to push government budgets into deficits and put the national debt on a rising trajectory once again.
Jonathan Portes agrees:
Well, 1.2 per cent of GDP is much less than the fiscal adjustment we’ve seen over the last three years alone. So it’s hardly unachievable.
As they say, this is a lot less than the cuts and tax increases that will have taken place between 2010 and 2018. In any case, fifty years is a long time and a lot could happen between now and 2062. Who knows, Prince
Whatshisface George Alexander Louis might even be king by then.
The OBR’s report is certainly less pessimistic than some other forecasts I have commented on here. It reckons that the UK’s output gap is high (see previous post for a discussion of this) meaning that there is still a lot of potential growth in the economy. Once this gets going, it will be more than enough to cover the increased costs of demographic change for all of the next decade. Only after 2030 will the costs once again start to outstrip GDP growth. The 2020s will deliver enough economic growth to give the government a temporary respite from severe fiscal pressure.
So we don’t need to worry then. The next generation won’t have to endure years of austerity to cover our mistakes. Life in the 2020s will finally get back to normal.
Er, not quite! The problem is not so much the projections as where the OBR’s forecast starts from. It assumes that the government will have met the target set out in the spending review and eliminated the deficit by 2017-18. This implies that the planned spending cuts will have been delivered too. As the report says on page 79:
[T]he government has pencilled in spending cuts for 2017-18, which in our projections reduces health, education and other spending as a share of GDP in the long term…
Furthermore, this reduction is really important. Even if the government misses it by a relatively small amount, the effects on the projected debt levels are huge. If there is still a deficit of 1 percent of GDP by 2018, there will be around 50 percent more debt by 2062, says the OBR.
So eliminating that deficit is pretty damned crucial then!
The trouble is, these ‘pencilled in’ cuts are the very same ones that the Institute for Fiscal Studies reckons are unachievable without severe cutbacks to public services and which the Local Government Association says will lead to the state completely withdrawing from some activities. (See previous posts.)
The state that happily chugs on through the 2020s with falling spending to GDP ratios is a seriously pared down one! And even that starts to go back into deficit during the 2030s as demographic pressures continue to push up spending.
The stark truth is that, from now on, there will be continuing upward pressure on public spending. Ageing populations need more pension payments and, more importantly, more health care. And, as more of them live longer, the costs keep going up.
This leaves the government with very little room for manoeuvre. If it wants to get its debt-to-GDP back to where it was before the financial crisis by 2062, it has to either raise taxes or cut spending on public services and benefits.
Ben Chu and Jonathan Portes are right, £19bn isn’t a lot to find but, come 2020, if things have gone according to the governmemt’s plans, there won’t be a lot left to cut. And the longer subsequent governments leave it before bringing in further cuts or tax increases, the more expensive those measures will eventually be.
The 2020s, then, might see a brief easing of fiscal pressures but they certainly won’t be ‘back to normal’ as far as the public finances are concerned. There will be no room for Conservatives to cut taxes or Labour to restore the state to its 2007 levels. Both would risk tipping the country back into deficit and increasing the debt once more.
I’m sorry but I’m with the miserable gits on this one. I agree that some of the articles Ben Chu referred to were a bit hysterical (and the City AM one was misleading) but the UK’s fiscal outlook for the medium term is pretty grim. Even if we get back to normal growth in the next decade, we will still have to deal with the after effects of this one. And they will be with us for at least two more kings. Probably more.