Is austerity over?

Is austerity really over? That depends what you mean by austerity, of course. Certainly the aggressive deficit reduction targets that George Osborne set and kept missing have been abandoned. As the Resolution Foundation’s Adam Corlett pointed out before the election, going by the OBR’s most recent forecasts, it is now unlikely that the deficit will be eliminated before the middle of the next decade.

This means that the cuts to public service spending will not be as severe as they were in the first half of this decade. As this next chart, from the Institute for Fiscal Studies shows, real terms public service spending is forecast to increase slightly during the next few years. However (and its surprising how often this gets missed in discussions about public spending) the population is forecast to rise so spending per person is still likely to fall.

Departmental expenditure limits since 2007–08Once you take out capital investment, there is a sharper fall in the amount left for day-to-day public service spending. The Office for Budget Responsibility expects it to fall by around 6 percent by 2022.

The trouble is, these shallow cuts will come on top of deeper ones made earlier in the decade. A report by the Institute for Government earlier this year warned that the ability of the public sector to maintain services while cutting budgets has “run out of steam”. Warning lights are flashing in the NHS, in schools and in local councils. Even this scaled back austerity might be enough to tip some public services over the edge.

And what of the other half of public spending, social security? This, too, is set to fall, as this IFS chart shows.

However, it might not fall by as much as the government thinks. Look at this chart closely and you will see that, in spite of the employment rate being at a record level and benefit entitlements having been reduced, working-age benefits are still slightly higher relative to national income than they were before the financial crisis. A combination of low wages and high housing costs means that, even though they are in paid employment, many people still rely on some form of state support.

This is unlikely to change much over the next few years. When George Osborne planned these benefit cuts, he assumed that the economy was set for a period of steady growth for the rest of the decade. That now looks very optimistic. Since the Brexit vote, the OBR has downgraded its growth forecast.

Inevitably, this will have an impact on earnings. The Resolution Foundation does not expect average pay to return to its pre recession level until the next decade.

Return of pay squeeze leaves average weekly earnings £16 below peak. Restoration of peak likely to be delayed well into next decade pic.twitter.com/g8yBYjZLR1

— ResolutionFoundation (@resfoundation) June 14, 2017

Furthermore, it forecasts that the combined effect of low pay, inflation, high housing costs and benefit cuts will lead to a significant fall in income for those in the lower half of the income distribution.

Until now, our tax and benefit system has been doing a reasonable job of levelling out the UK’s income inequality. If these cuts go through, all that will change.

Which is why I’m not convinced that they will. The question of cuts to tax credits was kicked down the road when there was a row about it in 2015. At the time I suggested that the distress caused by the cuts might be politically damaging and could even cause social unrest. Looking at the mood of the country at the moment, that looks even more likely now than it did a couple of years ago. The government backed off in 2015. Is a minority government, mired in Brexit negotiations and with a slowing economy, likely to show more resolve?

But if the government can’t cut the cost of benefits, it either has to borrow more, increase taxes or make even deeper cuts to public services. Perhaps that is why the chancellor has made gentle hints about tax rises. If they happen, it is unlikely that they will only hit ‘the rich’.

So, while  George Osborne’s aggressive deficit target has been abandoned, when it comes to people’s experience of public services and the tax and benefits system, austerity is far from over. Taxes may rise and benefits will almost certainly be cut. The public sector will find it ever more difficult to provide services to a rising population. Such is the brutal arithmetic of public spending. After the cuts of the last few years, even the relatively mild ones to come are going to hurt.