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IFS - Government to take big spending decisions with little idea how sustainable they will prove

With pledges on schools, further education, the NHS, defence and overseas aid, day-to-day spending on these public services is already set to be at least £9 billion higher next year than this year. 

The Chancellor will need to find a way to fund an extra £5 billion of spending next year, relative to plans published at the Spring Statement, just to avoid cuts to other public services. Increasing spending on other priority areas would require even greater funding.

OBR figures at Spring Statement time gave the government £15 billion of headroom against its target to keep borrowing below 2% of national income next year. This looks like plenty to allow a decisive break with austerity. Given that the spending round will not be accompanied by new OBR forecasts the Chancellor is likely to announce spending increases and claim he is meeting his fiscal targets. 

But with economic forecasts deteriorating, even when a Brexit deal is assumed, if we do get such a break with austerity the next OBR report could show that we are not on course to keep borrowing below 2% of national income. Whether that would be consistent with the fiscal target to keep borrowing below 2% of national income on a cyclically adjusted basis would depend on the OBR’s view of the extent to which any slowdown represented just temporary weakness as opposed to a permanent hit to the economy.  

With a no deal Brexit borrowing is likely to be much higher – by £30 billion according to the OBR even in a relatively optimistic scenario.

Making major fiscal announcements without new OBR forecasts risk a return to the bad old days when chancellors could make fiscal claims not based on the best available independent forecasts. 

These are among the findings of a new report looking at options for this week’s spending round. Other findings include:

  • Government borrowing last year was at a 17 year low. This follows a reduction in total public spending from 45% of national income in 2009−10 to 38% in 2018−19 (which is where it was in 2003−4);
  • In real terms public spending is at about the same level as it was in 2009-10, but population increase means that spending per person has fallen by more than 6%.
  • Spending by the Home Office, Ministry of Justice and local government was more than 20% lower in 2018−19 than in 2009−10. Not surprisingly services provided by them have suffered particularly badly;
  • Health spending, by contrast, has risen by nearly 20%. By 2022−23 health spending is set to account for 42% of all departmental spending, up from 23% in the year 2000;

Ben Zaranko, an author of the report said “Significant sums are already pledged for schools and the health service, more is coming for the police, and there are commitments on defence and aid spending. This spending round will, though, also need to consider very carefully the clear and growing need for funding in our justice system and in local government, including social care, where cuts over the past decade have been particularly severe”.

Rowena Crawford added “Based on OBR forecasts from the spring it looks like the Chancellor has plenty of room to meet his spending pledges, increase spending in some other priority areas and avoid any further cuts, while keeping to his pledge to keep borrowing below 2% of national income. But growth has slowed since the spring and in reality he may have a lot less than the £15 billion of headroom he seemed to have back then”.

Paul Johnson commented “Making big fiscal announcements in a period of great economic uncertainty means we will have little idea how sustainable or costly decisions made this week will be. The risks are exacerbated by not having up to date forecasts from the OBR. Fiscal events and forecasts should occur together if we are to maintain faith in a fiscal framework which has served us well in terms of transparency since it was introduced in 2010”.

Spending review 2019: Deal or no deal

Original article link: https://www.ifs.org.uk/publications/14349

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