Spending choices after 2015
Nida Broughton
Social Market Foundation
@SMFthinktank | smf.co.uk
Figure 1: Borrowing and deficit as a % of GDP
The state of the public finances
o At end of 2009-10, borrowing was
10% of GDP; current deficit 7%
o In 2014-15, borrowing expected to
be 5% of GDP; current deficit 3%
o On Budget 2015 plans, current
budget in surplus by 2017-18;
borrowing eliminated by 2018-19
12.0
2010 parliament
2015 parliament
10.0
8.0
6.0
4.0
2.0
0.0
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
-2.0
-4.0
Public sector net borrowing
Source: OBR March 2015, based on Budget 2015 figures
Current budget deficit
Key reason why deficit reduction isn’t over: tax revenues
Figure 2: Receipts and spending, £ billions
(2014-15 prices, June 2010 forecast)
Figure 3: Receipts and spending, £ billions
(2014-15 prices)
800
750
700
650
600
550
500
450
400
800
750
700
650
600
550
500
450
400
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2009-10
2010-11
2011-12
2012-13
2013-14
Receipts forecast
Receipts
Total managed exp forecast
Total Managed Expenditure
Current expenditure forecast
Current expenditure
Source: OBR March 2015; June 2010
Source: OBR March 2015; June 2010
2014-15
Figure 4: Receipts and spending, £ billions
(2014-15 prices)
The state of the public finances
800
o Expecting tax revenues to pick
up as economy grows from 2015
750
700
650
o On Budget 2015 figures,
spending falls until 2018-19, and
then rises again
o By 2020, small surplus of £7
billion.
600
550
500
450
400
Receipts
Total Managed Expenditure
Current expenditure
Source: OBR March 2015, based on Budget 2015 figures
Figure 5: Departmental spending
The state of the public finances
-20%
-15%
-10%
-5%
0%
5%
o Total change in spending between 201011 and 2019-20 – only 4% fall (real
terms)
10%
2010-11 to 2015-16
2015-16 to 2018-19
o But that conceals big differences
o Annually managed expenditure (welfare,
debt payments) rose by 6% in current
Parliament; rises by 6% in next
2019-20
2010-11 to 2019-20
o Departmental spending has to fall to
compensate
Source: OBR March 2015, based on Budget 2015 figures
What could happen after the election
o Plans likely to change after the election. Different parties have:
• different deficit reduction targets
• different approaches to achieving deficit reduction
o OBR says of spending plans in Budget 2015:
‘The Treasury has confirmed that this “represents the Government’s agreed position for
Budget 2015” and that it was “discussed by the Quad and agreed by both parties in the
Coalition.” But both parties in the Coalition have said that they would pursue different
policies if they were to govern alone.’
What could happen after the election?
Conservatives
Target: Run a current surplus by 2017-18; run overall surplus in next Parliament
o Could slightly ease up on cuts – eat into £7 billion surplus in 2019-20
Approach: So far, focused on £30 billion of cuts by 2017-18. Aiming for:
o £12 billion from welfare;
o £5 billion tax avoidance, evasion, aggressive tax planning;
o £13 billion from departmental spending
If it’s possible to do this, departmental spending would only need to fall by just over 3% between
2015-16 and 2017-18. If allowed to rise after 2018-19 (as in B15 plans), cut could be under 1%.
What could happen after the election?
Liberal Democrats
Target: Eliminate structural current budget deficit by 2017-18; then cut debt as share of GDP
o By 2019-20, under “alternative fiscal scenario”, total spending is £36 billion higher than B15
plans
Approach: So far, focused on cuts needed by 2017-18. Aiming for:
o
o
o
o
£3.5 billion from welfare;
£6 billion tax avoidance, evasion, aggressive tax planning;
£6 billion from tax rises;
£12 billion from departmental spending
Fall of 3% in departmental spending by 2017-18, but then rises by 6% to end of 2020
What could happen after the election?
Labour
Target: Get the current budget into surplus and national debt falling as % of GDP “as soon as
possible”
o Could have similar amount of room to Lib Dems. Current budget surplus in 2020 in B15 plans is
£39 billion.
o Committed to new Budget Charter to eliminate structural current budget by 2017-18 – but it’s a
rolling deadline
Approach:
o Mix of taxes, departmental spending and welfare
Implications for capital spending
Figure 6: Public sector gross investment (£ billion,
2014-15 prices)
Budget 2015 implies overall rise in gross
investment to 2020
o Although not enough to reverse fall since
2010
90
80
70
60
50
o So main burden of departmental cuts to fall
on current departmental spending
40
30
20
10
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Public sector net investment
Source: OBR March 2015, based on Budget 2015 figures
Depreciation
Implications for capital spending
o George Osborne: “Government capital
investment should be paid for with savings
in other less productive parts of the
government budget…In the next
Parliament we will always grow capital
investment at least in line with GDP.”
Figure 7: Public sector gross investment (£ billion,
2014-15 prices)
90
80
70
60
50
40
o Lib Dems & Labour – main target
excludes investment
o Danny Alexander: After 2017-18,
“borrowing for productive investment in
infrastructure – in roads, railways,
broadband and housing – can and should
be part of our plan.”
30
20
10
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Public sector net investment
Source: OBR March 2015, based on Budget 2015 figures
Depreciation
Figure 8: Receipts and spending, £ billions
(2014-15 prices)
But the economy could change all this
o OBR is assuming that productivity growth
picks up – driving up tax revenues
800
750
700
o But so far, it has been disappointed
650
600
Putting pressure on departmental
spending
o Especially as a range of areas are set to be
protected – pensions, NHS, education,
international development
550
500
450
400
Receipts
Total Managed Expenditure
Current expenditure
Source: OBR March 2015, based on Budget 2015 figures
Final thoughts
o Rising tax revenues put in a lot of the hard work – assuming economic growth is
sustained
o Growth is key to repairing the public finances
o Next Spending Review must take a “growth-friendly” approach
• Including capital investment, skills, research