What next for the economy?

Headlines from the IFS Green Budget 2013

Each year, the Institute for Fiscal Studies produces its highly-regarded ‘green budget’ analysis shortly ahead of the Budget. This morning, I was at the launch of its 2013 Green Budget at UCL’s Senate House. And by the looks of the attendance list, half the Treasury were as well.

For me, the most interesting comment of the morning was from IFS director Paul Johnson, talking about the huge further cuts to departmental expenditure pencilled in for after the next general election in 2015. “We shouldn’t lose our sense of shock and awe about these numbers. Most of these numbers are unprecedented historically.” Assuming some areas (health, aid, education) continue to be protected, the cumulative cuts to unprotected departmental expenditure would average 33.2% in real terms between 2010 and 2018. When considering the impact that this will have on police, justice, communities and other public services – you have to wonder whether an incoming Government would really see through these further cuts.

As his colleagues went on to point out, every incoming Government for decades has increased taxes in their first year of coming to power. Just maybe then, we can assume that something in these plans will have to give – but probably not until 2015.

In the meantime, we can expect welfare and public spending cuts to bite hard, with these measures affecting people on benefits the hardest.

I recommend a read of the executive summary of the Green Budget report for anyone who wants to know more, but here’s a quick note of the key points I took down from this morning’s presentations:

Macro-economic outlook (analysis by John Walker, Oxford Economics)

• Overall, the UK economy is predicted to do better than in 2012, in part due to improving confidence in Eurozone stability and some expected recovery in exports. GDP is forecast to grow 1% in 2013, after 0% in 2012.

• Interesting to compare the last couple of years with US though, where fiscal tightening has not kicked in as quickly. Their GDP continues to grow above 2%.

• Moderate pick-up in consumer spending and business investment predicted for 2013.

• Inflation remains high at present, but is expected to fall to target of 2% (CPI measure) by end 2013.

• Policymakers are trying to figure out why GDP has flatlined, while employment has actually been going up – indicating an output gap. If this implies there is spare capacity in the economy, this could be good news that would see businesses return to strength faster than forecast.

Public finances (analysis by Gemma Tetlow, IFS)

• Contrary to Government rhetoric, public sector borrowing has been increasing and is expected to be higher again in 2013 than official projections by the Office for Budget Responsibility.

• In the medium term, increased borrowing means that the Chancellor will only stay on track for his fiscal mandate (to eliminate the deficit within 5 years) if he can increase tax receipts or decrease spending further.  Therefore, in the 2012 Autumn statement, he announced that current ‘austerity’ measures would need to continue until 2017-18 in order to balance the books.

Public spending (analysis by Jonathan Cribb, IFS)

• Based on the Government’s 2010 spending review, tax increases and spending cuts were planned to last until 2015. So far, most of the planned tax increases and capital expenditure cuts have been implemented, but welfare and departmental spending cuts have not yet fully kicked in. So we already know that 2013/14 and 2014/15 will see significant further cuts.

• Meanwhile, it has been announced that in 2013, there will be a spending review to plan for 2015/16. IFS state that this will see a further 2.4% cut to departmental budgets.

• Taking into account cuts already planned to 2014/15, and expected cuts for 2015/16, the Chancellor will still have a long way to go to meet his targets. If, after a general election, the incoming Government were to continue with the current spending plans, IFS estimate that a further 6.6% cut would be required from departmental budgets to 2018.

• Cumulatively then, the total cuts to departmental budgets between 2010-2018 would amount to 18.6% in real terms. However, each department will have been hit to a greater or lesser degree. If some areas of spending continue to be protected (health, aid, education), then the cumulative cuts to unprotected departmental expenditure between 2010-18 would amount to 33.2% in real terms.

A couple of interesting points also arose during the Q&A:

• In overall terms, there will be a small net ‘giveaway’ in 2013: although benefits will be cut, many will benefit from the increase in the personal allowance. Of course, this doesn’t mitigate the impact for those who are hit hardest by the cuts.

• Currently, the Government’s plans suggest that fiscal tightening in 2016/17 & 2017/18 will all come from further cuts. But history shows that incoming Governments raise taxes, so realistic to expect some tax rises to mitigate need for further cuts.

NCVO Policy Team’s blog

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Charlotte Ravenscroft was NCVO’s head of policy and public services. Charlotte’s wrote about funding, public service delivery, and strengthening the evidence base for voluntary action. She has also worked at The National Lottery Community Fund and the Department for Education.

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