Book Chapters

Risks to the rules: public spending

Date: 08 February 2016
Authors:
Publisher: Institute for Fiscal Studies

The government intends to reach a budget surplus of 0.5% of national income in 2019–20 by increasing tax revenues over this parliament by 1.1% of national income and reducing total public spending by 3.2% of national income. Total public spending (excluding housing associations) in 2019–20 would then amount to 36.1% of national income. This would be the lowest level of public spending for 60 years, with the exception of 1999–2000 and 2000–01.

The main points covered by this chapter are:

  • The government’s objective of having a budget surplus in 2019–20 is set to be achieved with a level of public spending that will be the lowest as a share of national income for over 60 years with the exception of 1999–2000 and 2000–01. Spending on public services in 2019–20 is set to fall to its lowest level as a share of national income since the early 2000s. Spending on services outside of health will be at its lowest level since at least 1948–49.
  • Public service spending by central government and local authorities is forecast to be cut by 1.0% between 2015–16 and 2019–20, compared with 8.3% between 2010–11 and 2015–16.
  • A growing and ageing population will increase demands for many public services. Public service spending per person by central government and local authorities is forecast to fall by 3.7% over this parliament and by 14.9% between 2010–11 and 2019–20. While NHS spending is expected to grow by 6.1% in real terms over the parliament, over three-quarters of this real increase will be needed just to keep pace with the changing size and demographic structure of the population.
  • In addition, changes to National Insurance contributions will cost public sector employers an additional £3.3 billion a year, while Resolution Foundation estimates suggest that the new National Living Wage could cost more than £1 billion a year.
  • The government’s spending plans imply that public sector pay will fall to much its lowest level relative to the private sector since at least the mid 1990s, when comparable data are available. This could result in difficulties for public sector employers trying to recruit and retain high-quality, motivated workers and raises the possibility of (further) industrial relations issues.
  • The Chancellor has set out £12 billion of cuts to annual spending on working-age benefits and tax credits by 2019–20. This is the same magnitude, but two years later, than pledged in the Conservative Party manifesto. Benefit levels for some groups will reach very low levels relative to earnings by comparison with historical rates. One risk to the public finances is that the latest disability benefit reforms might not deliver as large or swift a cut to spending as forecasts assume.
  • Lower expected interest rates or further delay to the expected date at which the Bank of England begins to unwind quantitative easing would reduce expected debt interest spending. But both of these would likely indicate a weaker, not stronger, economy. So, while they would reduce debt interest spending, they would likely signal bad news overall for the UK’s public finances.
  • Together, the risks to revenues and to spending, combined with the OBR’s central estimate of a surplus of (only) 0.5% of national income in 2019–20, suggest that there is a significant chance that the government’s current fiscal plans will not deliver the targeted surplus in that year without further tax rises or spending cuts.

This chapter was presented at the Green Budget launch on 8 February 2016. All presentations are available to view on our Youtube Green Budget 2016 playlist