At first sight, the cuts to public service spending outlined in yesterday’s budget don’t look that much bigger than those in the autumn statement. As these charts from the OBR’s Economic and fiscal outlook show, day-to-day spending on public services is set to fall by £11.6 billion, £1.2 billion more than the chancellor forecast in December. There is also no end-of-parliament boost, of which more later.
This sounds like a lot and public service providers will find the cuts difficult to make but the reduction in spending is nowhere near what we were talking about this time last year and a very long way from the sheer lunacy of the previous autumn.
An extra year to meet the target, some optimistic revenue forecasts and shifting more of the deficit reduction burden onto welfare helped to ease the pressure on public service spending.
Since the autumn, though, things have gotten that bit worse. The OBR has downgraded its productivity forecast and its growth forecast for the rest of the decade.
This, says Chris Giles, is “unremittingly bad”:
There are two big judgments the OBR has made in this Budget: lowering the outlook for productivity growth, and reducing the expectation for the rise in the overall size of the economy.
The first matters for growth with the OBR now thinking the UK can sustain an expansion of only 2.1 per cent a year. When Gordon Brown was chancellor, he thought a “cautious” estimate was 2.75 per cent a year and this lowers income and revenues without lowering public spending.
The second matters for tax revenues, which are levied on incomes, spending and profits, all of which are affected by inflation. Cut nominal GDP forecasts and tax revenues come down even if the exchequer makes some savings from lower forecasts for interest payments on government debt.
In the Autumn Statement, the OBR gave the chancellor an unexpected £27bn windfall to spend between 2015 and 2020. On the same basis, it has taken away £52bn today.
£27 billion to £52 billion? Looks like the OBR has repossessed the sofa and charged interest.
The upshot of this is that, by 2019, annual tax revenues are set to fall some £16 billion short of the November 2015 forecast. To get back to his surplus target by 2019-20, the chancellor will therefore need to find more money from somewhere. As this OBR chart shows, he is helped by the UK’s record low borrowing costs and he has made the rest up from tax increases and cuts to spending on public services and welfare.
The sharp-eyed among you will have spotted an item labelled “Public service pensions measure”. This is a plan to increase public sector employers’ pension contributions. The OBR explains:
[T]he Government has also placed an additional £2.0 billion a year squeeze on departments in that year by raising planned public service pension contributions, in line with a lower discount rate, but not compensating them for the additional costs they will face. This reduces borrowing by displacing other departmental spending within existing expenditure limits, while reducing net spending on public service pensions.
People who know a lot more about this than I do were somewhat baffled:
Freely admit I don’t know exactly what’s going on there but I do know you don’t get £2bn out of public sector pensions painlessly
— Gaby Hinsliff (@gabyhinsliff) March 16, 2016
I don’t understand why “updating” public-sector pensions discount rate saves £2bn a year. Shouldn’t rate be cut, so costing Treasury money?
— Robert Peston (@Peston) March 16, 2016
@Peston I don’t understand either, Robert….
— John Ralfe (@JohnRalfe1) March 16, 2016
But in my simple head, if you make public service providers pay an extra £2 billion into their pension schemes, that is money that has to come off the budget for day-to-day services. In effect, then, this amounts to an extra £2 billion stealth RDEL cut. So the £11.9 billion cut to day-to-day public service spending shown in chart 4.5 is actually £13.9 billion.
You will also notice an extra £2.5 billion of welfare cuts on the chart. Now I am still extremely sceptical about the government’s ability to achieve the welfare cuts it has already outlined, so I’m far from convinced about the additional saving. Without further tax increases, any shortfall in welfare savings will fall back on public services. That would bring us to cuts of £16.4 billion, not far short of where we were last summer.
There is something else about this that doesn’t ring true though. As Chart 4.5 above shows, most of the cuts come in the last year of this parliament. The government will, apparently, go from a £21.4 billion deficit to a £10.4 billion surplus in one year.
This isn’t what governments usually do in an election year. Accepted practice is to do all the nasty stuff early in the parliament and then give a bit away at the end.
Will any of this really happen, wonders Chris Giles:
Who knows? 2019-20 is just before the next election, so politics suggests it is not the optimal time to be imposing huge tax increases and spending cuts. There is still plenty of time for Mr Osborne to hope something good turns up and he can change his plans.
I’ve long thought that David Cameron and George Osborne are more Micawber than Machiavelli. The sofa has been repossessed but, who knows, another one might turn up before the end of the decade.