The brutal maths of public spending

More on the OBR’s Crisis and consolidation in the public finances report. (See yesterday’s post.) Chapter 6 contains lots of information and commentary on the government’s proposed deficit reduction strategy.

The OBR’s charts neatly sum up a lot of what I’ve been trying to say about the outlook for public spending. Debt interest is set to rise and social security costs to fall very slowly, so most of the deficit reduction has to come from cuts to public service spending.

Screen Shot 2014-09-12 at 07.01.05

The government is not planning to raise much additional tax so, to get the public finances back to where they were last time the country had a surplus, at the beginning of the century, it must offset the increased welfare and debt interest payments with a big cut to capital (CDEL) and day-to-day (RDEL) public service spending.

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As the report comments:

Interestingly, the levels of total receipts and total spending that we forecast for 2018-19 are very similar to those recorded in 2001-02 at around 38 per cent of GDP. So on current Government policy we are not expecting the UK to become a significantly higher spending and higher taxing, or lower spending and lower taxing, economy in 2018-19 than we were the last time the budget was broadly in balance 14 years ago. Receipts are expected to be just 0.6 per cent of GDP higher than in 2001-02 at 38.1 per cent of GDP and spending just 0.1 per cent of GDP higher at 37.8 per cent of GDP.

So in one sense, the state gets back to roughly the size it was when Tony Blair went into his second term. The 2018 state will look very different from the 2002 one though.

[T]his similarity in the aggregates masks a big change in the composition of spending. We forecast that in 2018-19 the Government will be spending around 4 per cent of GDP (£66 billion a year in today’s terms) less on public services and capital spending than Labour did in 2001-02 and around the same amount more on welfare, debt interest and other annually managed expenditure.

Because there is more money to find for welfare and debt interest now, that 38 percent of GDP doesn’t leave us with anywhere near as much to spend on public services. Without tax increases, reducing the deficit to 2002 levels can’t be done without big cuts to public services.

This next chart illustrates the brutal arithmetic of public spending. Overall spending goes up in cash terms and the real terms cut of 4 percent looks quite small. But by the time welfare, debt interest and other AME spending have taken their slices, real terms public service spending (Total DEL) falls by 23 percent. Add in the effects of population change and per capita public service spending drops by 27.5 percent.

Screen Shot 2014-09-12 at 07.14.00

I was quite pleased when I saw this because the figures are not that far off the ones I came up with when I did a back-of-the-fag-packet calculation 5 months ago. I wasn’t scaremongering. The numbers really are that big.

On top of this is the stated aim of protecting the budgets for NHS, schools and overseas aid. This means that the amount left for everything else would be even less. The OBR estimates that cuts to the rest of public service spending would be around 36 percent in real terms, which is similar to the IFS figure. It doesn’t say how this would translate into a per capita amount. Someone with more time than I have at the moment can work that out but it will be a large number.

At this point the OBR’s remit stops. Its job is to look at the government’s spending plans and explain what the fiscal implications are. Whether or not these plans are achievable is for other people to judge. Rightly, it doesn’t go into discussions about how a government spending 28 percent less per person on public services will cope when more of those people are elderly and when the demands on services are that much greater. It is not the OBR’s job to comment on the implications of these plans for individual public services either. For example, whether the protected budget will be enough to stop the NHS from running out of money before the end of the decade is someone else’s call.

So that article in the Daily Mail which claimed that the OBR has ‘praised’ the government’s spending plans is utter garbage. It didn’t say Britain is on track to deliver these savings, as the Mail claimed. It simply said that, if the savings are achieved, based on what else we think will happen to the economy, these will be the results. To have endorsed or criticised the plans would be well beyond the OBR’s brief.

In its conclusion, the OBR says (my emphasis):

If our central forecast proved to be correct, this would deliver the first budget surplus for 18 years and would represent one of the largest deficit reductions among advanced economies in the post-war period.

In other words, since the creation of the modern welfare state, not many people have tried this. These are huge spending cuts, both by historical and international standards.

The OBR has provided the information, then, but it’s up to politicians, public service providers and others to interpret it and assess the implications. Most of those who have looked at the figures in any detail doubt that a per capita 28 percent reduction in public service spending is achievable. At least, not without the state withdrawing from the provision of some services or charging for them at the point of use.

Everyone else, including most of our politicians, is keeping quiet.

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4 Responses to The brutal maths of public spending

  1. SK says:

    Probably it is about time that house wealth was taxed. Not a vote-winner but probably the best solution.

    • P Hearn says:

      “Not a vote winner”. Could be a slight snag with that idea at election time then.

      The next election might be a good one to lose. Les poulets financiers reviennent à la maison pour se percher…

    • Bob says:

      Good. Don’t tax improvements/buildings/crops though, just land/location value. This would discourage hoarding of land (use it or sell to someone who will, a vacant lot in a city does not passively rise in value) and no dead weight loss as the land supply is fixed and land just exists, not produced by individual landowners. Value of land is produced by the community, good schools, infrastructure, location, etc… In fact is not so much a tax as a fee for excluding others from your land. Also reduces housing bubbles, see the bubble in business rates was shorter. This tax could first replace council tax/business rates and stamp duty and then cut income taxes and VAT across the board while increasing LVT.
      http://en.m.wikipedia.org/wiki/Land_value_tax

  2. David says:

    Nourriture de poulet compared to those ‘prudent’ Brown budgets

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