Some of yesterday’s biggest announcements were not from the Chancellor at all, they were from the independent Office for Budget Responsibility.
A polite way of saying don’t bother listening to George, just wait for the OBR figures to see what’s really going on.
Robert Chote and his team announced two big changes to the public finances. The first was a really substantial downgrade to expected tax revenues. It’s the fall in expected revenues of nearly £8 billion this year which accounts for the disappointing fall in the size of the deficit. Look out just three years to 2017-18 and the shortfall hits £21 billion. This lack of buoyancy in tax revenues, associated with poor earnings growth, looks like being a continued cause for concern.
The only reason that that didn’t drive a coach and horses through the fiscal forecasts was that the OBR made an offsetting forecast change – to expected spending on debt interest, expected to be about £16 billion lower in 2017-18 than was expected back in March.
In other words, but for a fall in borrowing costs, the lack of wage growth would have really screwed us. Stagnating pay, then, is doing more damage than the accumulated debt.
This means an increase in spending cuts to achieve the overall surplus in 2019, plus some more to hit “supposedly, an overall surplus of £23 billion by 2019-20”.
Which, he said, implies austerity until the end of the decade.:
[T]here is no spending dividend on the horizon. Far from it. There are huge cuts to come. On these plans, whatever way you look at it, we are considerably less than half way through the cuts.
He went on to make this crucial point:
It is important to understand why the deficit hasn’t fallen. It is emphatically not because the government has failed to impose the intended spending cuts. It is because the economy performed so poorly in the first half of the parliament, hitting revenues very hard.
As ever there are different ways of looking at the scale of cuts. If you look at total government spending less spending on debt interest (a measure the prime minister has used at times) then spending is down by £11 billion in the four years to 2014-15, and is due to fall a further £38 billion in the five years to 2019-20. The relatively modest fall over this parliament is largely explained by increased spending on social security, especially pensions.
If you look specifically at spending by Whitehall departments, then about £35 billion of cuts have happened, with £55 billion to come.
If anything, public sector organisations have over-achieved on spending cuts. They have done all that was asked of them and more. The missed deficit target is due to poor tax revenues and higher than forecast benefit costs. An ageing population and a labour market in the doldrums have trashed the deficit target.
All this means that the surplus George Osborne hoped to achieve by the end of this parliament won’t be achieved until towards the end of the decade.
Comparing the March OBR forecast for day-to-day public services spending (RDEL) with the one from this week shows how the forecast has deteriorated and how much extra shrinkage is needed for the 2019-20 surplus.
This chart is actually from September’s Crisis and consolidation in the public finances report. The figures are the same as they were in March but it’s a clearer graph.
Some of the figures in Wednesday’s chart are slightly different because of the change in the way GDP is calculated but it doesn’t make much difference to the numbers at the end of the decade.
Day-to-day public services spending falls by 6.1 billion more than expected (at today’s prices) in 2018-19, then another £3.2 billion comes off the following year. What looked like a 26 percent cut in per capita RDEL spending between 2009-10 and 2018-19 is now a 29 percent cut, rising to 31 percent by the end of the decade. Public spending figures that were barely believable in March now look completely bonkers.
Paul Johnson also remarked on the Candour Deficit:
[I]t is surely incumbent upon anyone set on taking the size of the state to its smallest in many generations to tell us what that means. How will these cuts be implemented? What will local government, the defence force, the transport system, look like in this world? Is this a fundamental reimagining of the role of the state?
One thing is for sure. If we move in anything like this direction, whilst continuing to protect health and pensions, the role and shape of the state will have changed beyond recognition.
The reimagining hasn’t happened though. As Chris said last week, there has been no state-shrinking strategy, just a lot of numbers and some vague statements about efficiency savings. Five years on and the government still seems to have no idea how to go about it.
Cutting spending to the levels implied in these plans would mean closing parts of the state down. Before giving anyone another 5 years in power, we should be asking them which bits they intend to close.