Chancellor cock-a-hoop as OBR finds money behind the sofa

There will be some sense of relief in the public sector after yesterday’s Autumn Statement. According to the OBR, the £42 billion real terms cut in day-to-day public service spending (RDEL) it forecast only half a year ago is now down to just over £10 billion.

In cash terms, the governments plans imply hardly any cuts at all to the total amount. Overall spending on public services is set to rise, albeit not in line with inflation.

Of course, the effect of protecting some departments means others will still have to make significant cuts but the overall picture is nowhere near as bleak as it looked only a few months ago.

So what has changed?

Effectively, the something that Dave and George hoped would turn up just has. Or, at least, the OBR thinks it will. It expects slightly higher economic growth than it forecast earlier in the year, together with lower welfare costs and significantly higher tax receipts.

The effects of this can be seen in the OBR’s charts on the sources of deficit reduction. Compare March with November.

March 2015

November 2015

In yesterday’s forecast, increased tax receipts and reductions in welfare spending take a lot more of the load so the deficit can be eliminated without the swingeing cuts to public service spending predicted in March.

The next chart shows the latest forecast compared with the March one and with what happened in the last parliament. It’s a bit confusing because the two forecasts are on the outside and 2010-15 in the middle.

The far left column shows how much more reduced welfare (yellow) and higher tax receipts (green) contribute than in the March forecast  (far right). It also shows the difference between both and what happened over the last five years. Six months ago we thought that public services were due for even greater cuts than those seen in the last parliament. Now it looks as though they won’t be anywhere near as deep.

After the cuts public sector organisations have sustained over the past five years and with increasing pressure on the NHS and councils due to ageing and population increase, even a cut of £10.4 billion will make life difficult. Probably not catastrophically so though. The forecast reduction in day-to-day public service spending is £30 billion less than we thought it was going to be in March. The collapse of a major public service by the end of the decade looks much less likely than it did six months ago.

Of course, holding public service spending cuts down to this level is dependent on the tax receipts rolling in and the welfare costs falling as predicted. The chancellor is still promising to reduce social security costs by £12 billion. Even with improved growth and higher wages, it’s still difficult to see how he will manage that.

Then there’s the question of growth. Firstly, with signs of a global slowdown, can our economy be expected to grow as quickly as the OBR predicts? Secondly, even if it does, how much of it will translate into tax receipts? As Mike Bird says, the OBR has tended to be over-optimistic about government revenues in the past. Is an extra £27 billion realistic?

If welfare costs don’t fall and tax receipts don’t rise by as much as the OBR forecasts, we are back to public service cuts as the only means of eliminating the deficit. Yesterday’s figures look more encouraging than anything we have seen in recent years but it does feel a bit like suddenly finding money down the back of the sofa. Perhaps something will turn up to ease the government’s deficit challenge but it hasn’t yet and there are still some very good reasons why it might not.