Which bits of the state do you plan to close, minister?

The Chancellor tried his best to put a positive spin on the Autumn Statement but any optimism was snuffed out by the IFS yesterday. Here’s IFS Director Paul Johnson:

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.

Screen Shot 2014-12-05 at 08.20.47

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.

Screen Shot 2014-12-03 at 13.56.30

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.

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6 Responses to Which bits of the state do you plan to close, minister?

  1. TickyW says:

    @Rick

    Here is an extract from George Osborne’s 2012 speech to the Tory Party conference:

    “I’m a low tax, small government Conservative.

    But I’ve never thought the state is without a role to play in the economy.

    We’re Conservatives not Anarchists.

    We’ve never allowed uncontrolled capitalism free-rein.”

    The extract reveals that Osborne does indeed want small government (and not just smaller government). Given the insensitivity of his cuts, and his apparent indifference to those affected, I conclude that his is a strategy to reduce the size of the state come what may. The extract reveals his political philosophy to be close to Robert Nozick’s, who advocated a minimal, “night-watchman state”

    He says he wants a small state in exactly those terms. His actions are consistent with achieving a small state (as Robert Johnson from the IFS has said). From this I conclude his policy is to massively downsize the state. The deficit / debt narrative is a side issue and probably a rhetorical tool to garner electoral support for his goal

    Although you say his plans are undeliverable, I believe he will attempt to carry them through if his party is elected in 2015. I agree there will be social meltdown but Osborne will regard this as a price worth paying for achieving a small state.

  2. Dave Timoney says:

    Imagine a Tory politician claiming “I’m a high tax, big government Conservative”. Nope. It’s never happened. Despite Tories consistently claiming to be in favour of low taxes and a small state, they have maintained much the same aggregate fiscal policy as Labour administrations since WW2. The difference has been a greater bias away from income and capital taxes to indirect taxation (notably VAT), and the transfer of property from public to private onwership (council house sales, privatisation etc), both of which favour their preferred constituents.

    Public expenditure continues to bump around 40% of GDP, oscillating with the economic cycle. The current failure to pay down the deficit is due to low tax revenues and the automatic stabilisiers of increased (and increasingly in-work) benefits. As pretty much everyone now recognises, the scale of cuts proposed is not credible because so much public expenditure is outwith the Chancellor’s immediate control – i.e. the product of economic growth and the composition of that growth (e.g. job polarisation). If secular stagnation persists (and the Eurozone maintains its deflationary stance), public expenditure can only contract if government abolishes entitlements outright (the 4-year threshold proposed for immigrants is suggestive), which would lead to riots.

    Osborne’s statement is guff.

    • TickyW says:

      @Dave

      Post-war Tory administrations prior to Thatcher were philosophically on board with a large state. The consensus was Keynesian and this suited necessary post-war reconstruction.

      The Tory party in in its latter incarnation, and Osborne is a stark manifestation, seeks to bring about a small state. Slashing public expenditure, whether there is a deficit or surplus, is how they seek to achieve this. And hang the consequences – it is “morally” the correct course of action.

      Osborne must have been made aware by his civil service advisers that his so-called deficit reduction plans will create chaos, misery and much social disorder. Yet despite this, he has lashed himself to the deficit reduction mast.

      The clues as to his motives – his 2012 Tory conference speech and his slash and burn plans announced in the 2014 Autumn statement – do not suggest cock-up. Rather the clues suggest deliberate strategy to “re-imagine the state”, as Paul Johnson from the IFS obliquely phrased it.

  3. Nicola says:

    Reblogged this on learn4kicks.

  4. Pingback: The fiscal vandalism of Brexit | Flip Chart Fairy Tales

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