Deficit reduction plan disappears into La La Land

Yesterday, what was left of the government’s deficit reduction plan moved even further into the realms of fantasy.

In its latest Economic and fiscal outlook, the Office for Budget Responsibility reduced its forecast for tax receipts over the rest of the decade.

[T]his year has seen a sharp fall in the amount of tax raised for every pound of measured economic activity. As a result, despite strong economic growth, the budget deficit is expected to fall by only £6.3 billion this year to £91.3 billion, around half the decline we expected in March. That would be the second smallest year-on-year reduction since its peak in 2009-10, despite this being the strongest year for GDP growth.

And so:

[O]ur forecast for public sector current receipts is lower across the forecast period compared with March. Receipts are £7.0 billion lower in 2014-15 and £25.1 billion lower in 2018-19.


The key reasons for the deterioration in the underlying forecast are:

  • income tax and NICs, where lower earnings more than outweigh higher employment growth to reduce receipts. Lower interest rates through the forecast also reduce tax on savings income;
  • VAT receipts, where weaker consumer spending and steeper falls in government procurement associated with implied falls in DEL spending reduce growth in the tax base;
  • UK oil and gas revenues, which are lower due to lower oil and gas prices;
  • tobacco receipts, which have been lower-than-expected this year and we have assumed a steeper fall in clearances over the forecast period;
  • capital gains tax receipts, which are expected to be lower due to lower equity prices; and
  • interest and dividend receipts, due to lower interest rates reducing returns on the government’s stock of financial assets.

The result is that the outlook for public finances has worsened. Add in the government’s plans to reduce public spending and things start to look very bad for public services.

The government has said it isn’t going to increase taxes and it will find it hard, if not impossible, to take significant amounts off social security spending. Spending on public services therefore has to bear the brunt of any cuts, including any fall in projected revenue.

As this chart shows, AME (mostly welfare and debt interest) falls only very slowly for the rest of the decade, so the spending reduction has to come from cuts to public service spending (DEL).

Screen Shot 2014-12-03 at 15.01.47

Take out capital spending and the forecasts for day-to-day public service spending (RDEL) look even worse. As a percentage of GDP, it falls from 21.2 in 2009-10 to 12.6 in 2019-20.

Screen Shot 2014-12-03 at 13.56.30


This, says the OBR, is a real-terms fall of around 25 percent and of 31 percent in per capita spending.

Screen Shot 2014-12-03 at 15.09.58


But spending on health, schools and overseas aid is to be protected. The OBR’s estimates for the revenue components of that spending are in this next table, with the impact of maintaining the protection in the column on the far right.

Screen Shot 2014-12-03 at 15.19.45

If health, education and aid are protected, then, we would be looking at a real-terms cut of 55 percent and a per capita cut of 57 percent for spending on everything else.

Let’s assume revenue spending on defence stays at this year’s 1.5 percent of GDP (if it falls much lower we’ll be in trouble with NATO). The OBR’s last Fiscal sustainability report estimated the cost of long-term care in 2019-20 at around 1.3 percent of GDP. Under these plans, then, that would leave about 1.4 percent of GDP for everything else.

All of which leaves local councils’ budgets looking very tight, even after they have raised extra cash from council tax.

Screen Shot 2014-12-03 at 15.39.15

You don’t need to look at these charts for too long to see the problem. The share of GDP taken by the big blocks on the bottom, health, education, social care (which includes elderly care) and emergency services, is unlikely to change much. Therefore everything else gets squeezed to the point where some services disappear.

There is no strategy for closing down parts of the state. Outside fringe meetings and think tanks, it hasn’t been discussed and it certainly won’t feature in anyone’s manifesto. Any decisions would therefore be reactive, piecemeal and random. Some councils would simply start closing services as they ran out of money.

It is very unlikely that this will happen. Even Conservative voters, for the most part, don’t want it. Eventually, whoever is in power after 2015 will have to push out the deficit reduction timetable, probably to the end of the decade, and raise taxes.

The precarious labour market and has pushed the Chancellor’s deficit reduction plan even further into La La Land. What little credibility it had has vanished along with the tax receipts. It’s time for politicians in all parties to close the Candour Deficit and start talking about what’s really going to happen in the second half of this decade.

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8 Responses to Deficit reduction plan disappears into La La Land

  1. SK says:

    You should also mention another giveway to house sellers..
    The feeble attempts of this government to keep the house prices rising beyond everybody’s means is unbelievable. Welcome to the UK society where flats will cost 500K and houses 1M and we will be split into BTL lords and tenants serfs..

  2. rogerh says:

    We have tried the ‘turn the fiscal thumbscrews’ option, now it is time for the ‘chuck money and hope’ option (and an election). As for the consequences – well who is going to foreclose on us anyway and having our own currency allows a different approach to taxation. Eat drink and be merry for tomorrow….

    Looking round the taxation scenery there seems a bit missing – pensions – how much could be garnered I don’t know but they stick out like a sore thumb.

  3. TickyW says:

    It’s a terrifying picture.

    Perhaps we should have joined the Euro. The consequences of Euro Austerity would not be so massively different from Osborne’s proposed Austerity.

  4. P Hearn says:

    The 2015 election is going to be a cracker. Ed Balls said this morning that Labour was every bit as committed to reducing the deficit as anyone else, so don’t think for a minute that they’re going to avoid the problem by printing money and borrowing more.

    When asked exactly when he planned to be in surplus, he replied “as soon as possible”, so there we are, nothing to worry about.

    With such a grasp of the economic fundamentals and steely determination to think about considering a policy review to formulate ideas for consideration at the party conference which might address the surrounding causes of the deficit, I was greatly reassured that Balls is on the case.

    We’ll be wrestling a deficit for decades to come. I hope my kids’ kids forgive me for idly watching it happen.

  5. JohnM says:

    Can you blame Ed-B for adopting the same tactics?
    He hardly has any choice. After all, we´re living in a ¨max´d out credit card country¨.
    The adopted rhetoric of the idle and the media whores who, when not licking-up and crumbs the politicians drop, are licking other things physically related to politicians.
    There is not much hope that things will improve, what with an uneducated and generally, if not personally, uninterested population and a one-story press.
    A fall in unemployment is hardly going to help the country, when most of the jobs come complete, and replete, with added-on under-employment benefit (AKA working benefit/housing-benefit, and council-tax benefit).

  6. Pingback: George Osborne as Britain’s Paul Ryan? | House of Cards

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