Tighter than thou

Date: 09 September 2009
Publisher: IFS

There is a lot we do not yet know about how Labour and the Conservatives would go about repairing Britain's battered public finances over the next few years. But yesterday's speeches by David Cameron and Alistair Darling at least highlight a sharp difference of opinion over what should be done next year. Yet the picture is quite not as straightforward as either makes out.

The Conservatives' latest line of attack is that the Government is planning to increase public spending by just over £30 billion next year, from £671.4 billion in 2009-10 to £701.7 billion in 2010-11. Mr Cameron said this was "reckless" and that spending cuts should begin next April to start bringing government borrowing back down to sustainable levels.

But it is worth remembering that two-thirds of the increase in spending next year can be accounted for by rising social security costs (which are forecast to go up by £6.2 billion) and increasing central government interest payments (which are forecast to rise by £15.7 billion). Neither is straightforward for the government to reduce sensibly in the short term.

Departmental Expenditure Limits - the amount Whitehall has to spend on public services and administration - are set to increase by only £3.2 billion next year (the Government already having cut them by £5 billion in last year's Pre-Budget Report, thanks to some conveniently identified "efficiency savings"). Once you take into account whole-economy inflation, this actually represents a 0.7% cut in real terms. If a Conservative government were to take office in May or June next year, it would be interesting to see where exactly they think they could make sensible and significant additional cuts in the remaining 10 months or so of a fiscal year that will already be underway.

Mr Darling meanwhile attacked the Conservatives for proposing early spending cuts on the grounds that this would withdraw support for the economy at a time when recovery is not yet firmly rooted: "At the weekend, G20 finance ministers agreed that we must continue to support our economies until recovery is established. To cut spending now would kill off the recovery."

But it is worth remembering that even the Government is currently planning to withdraw fiscal support for the economy next year. Its Budget plans show it ending the fiscal stimulus that is currently in place next year and beginning some modest tightening - a swing of around 2% of national income in total. Indeed, according to the International Monetary Fund, the UK is the only G20 country other than Argentina planning to withdraw its fiscal stimulus in calendar year 2010. The Conservatives are hardly likely to attack them on this front, as they opposed the stimulus in the first place. But there will be others of more Keynesian bent who think that the Government and the Conservatives alike are proposing to withdraw fiscal support for the economy prematurely.

The choices for 2010-11 are only a small part of the picture, of course. The parties will have to decide when and how quickly they would wish to reduce government borrowing over the longer-term - and through what combination of tax increases and spending cuts. On Wednesday 16th September we will be publishing a briefing note outlining some of the trade-offs.