Observations

How far through the consolidation are we?

Date: 30 October 2014
Authors:
Publisher: Institute for Fiscal Studies

The Prime Minister, in an article in today's Times, said "In this parliament we will have made £100 billion of savings while cutting income tax by £10.5 billion. In the next parliament we plan to make £25 billion of savings while making £7.2 billion of income tax cuts". This repeats a statement made at this year’s Conservative Party conference. The implication is that most of the planned cuts in public spending have been made and that the promised tax cuts in the next parliament are relatively modest by comparison with what has been managed in this parliament.

The problem is that the two numbers for “savings” are inconsistent and should not be compared with one another. Public spending cuts planned for the next parliament are about as severe as those which have been implemented over the past five years. Depending exactly how you make the comparison you could say we will be a bit less or a bit more than half way there by next April. (See for example http://www.ifs.org.uk/budgets/gb2014/gb2014_ch1.pdf and http://www.ifs.org.uk/budgets/gb2014/gb2014_ch2.pdf from this year’s IFS Green Budget).

So what is the £25 billion number? That is quite straightforward. It is the real terms cut in total public spending (excluding debt interest) expected for the years 2016-17 and 2017-18. This is a measure of the reduction in public spending (relative to economy wide inflation) which the government expects will occur over that period.

Note it is not a measure of cuts over the whole parliament: it excludes 2015-16 and 2018-19. It is also not a measure of discretionary changes in spending resulting from policy decisions over, for example, spending on public services or social security. It is a measure of the change in total non-interest spending. It is because some elements of spending, driven for example by an ageing population, have been rising, and will continue to rise, that such tough decisions have had to be taken over spending on public services, social security and taxation.

All that said this is a sensible measure of spending. It measures what is happening to the total amount spent by the government on things other than debt interest. On that basis we think total spending will fall by about £28 billion over the next parliament compared with about £23 billion of spending cuts which will have been implemented by the end of this parliament. We are just under half way there.

Indeed if you look at the period of the consolidation, the scale of the total deficit, the scale of the cyclically adjusted deficit, or the scale of spending reductions relative to pre-crisis expectations you get to broadly the same answer. On some bases we will be a bit more than half way through the cuts come the next election, on others a little bit less. There is no sense in which we will be 80% of the way through (which is what is implied by the statement that £100 billion of savings have been made with £25 billion to go).

So what is the £100 billion number which Prime Minister described as savings made over this parliament?

For a start it includes cuts planned for 2015-16 – i.e. in the next parliament, not this one.

More importantly it is calculated on an entirely different basis. It is a measure of policy activism, of the discretionary cuts implemented over the period from June 2010 to the end of 2015-16. It also takes account of the reduction in debt interest spending arising from a tighter fiscal stance. It is not a measure of the change in total spending. So, for example, it includes the effect of policy changes which have reduced spending on social security and public sector pensions to significantly below what they would have been in the absence of the cuts. It does not take account of the fact that other pressures have increased spending in these areas.

Again this is an entirely sensible way of looking at things. It is gives a good sense of the squeeze that is being applied to public spending. But it is not comparable with a number based on total spending.

The £25 billion number simply measures the change in spending relative to a baseline period, asking "how much less in total are we spending now relative to the baseline period". The £100 billion number measures the impact of discretionary policy change, asking "how much less are we spending compared with a world in which we had made no policy choices (relative to a particular counterfactual)".

There are different ways of looking at what is happening to public spending. They have different merits and are useful in their own right. To say that there have been "savings" of £100 billion over this parliament is a useful and interesting statement if one is clear about what it means (and takes account of the fact that it includes savings planned for 2015-16). It is also interesting and useful to say that £25 billion of "savings" are planned over the next parliament (or at least for the years 2016-17 and 2017-18). But it is not useful to use those two numbers together to suggest that the vast majority of the planned cuts have happened. They haven't.