Get ready for more cuts. That was the message delivered by David Cameron to the CBI’s annual conference when he warned that more savings would have to be found in the next parliament.
Just how big those savings will need to be is still a matter of conjecture. But, according to the Institute for Fiscal Studies, by the time of the 2015 election the government will be less than half way through an austerity programme it assumed would be over within the duration of one parliament.
The institute has dismissed the prime minister’s argument that after £100bn of cuts in his first term in Downing Street, there is only a £25bn mopping-up exercise still to go after the election. On the contrary, it has estimated that some Whitehall departments could be looking at a cumulative fall in their budgets of a third since 2010.
More cuts are coming for two main reasons. Although the economy is now growing at an annual rate of 3%, performance in the first three years of the parliament did not meet expectations. Lower growth means weaker tax revenues. A second factor has been the tendency of the economy to create lots of low-paid jobs. Many of those who have found work in the past couple of years do not earn enough to pay income tax. The ease with which some multinational companies have used loopholes and tax havens to minimise their tax bills has not helped either.
Back in 2010, George Osborne thought the government’s annual budget deficit – the gap between its spending and its income – would be below £40bn this year. As things stand, it will be close to £100bn. Hence the need for continued austerity.
So why is the pain likely to be bigger than Cameron is suggesting? Well, according to the IFS, the prime minister has included in his £100bn of savings some the cuts that are due to take place in the first year of the next parliament. His figures also exclude the last year of the next parliament. That makes the projected cuts look less onerous.
In addition, he is using two different measures of spending that are not strictly comparable. The projected £25bn of savings that the prime minister has pencilled in for the next parliament is a measure of all government spending bar interest payments. But the cost of an ageing population means that spending in some areas has been rising and will continue to rise. That makes reducing overall spending by £25bn more difficult.
The £100bn figure cited by the prime minister is a measure of discretionary spending cuts made between 2010 and 2015-16.
“To say that there have been ‘savings’ of £100bn 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)”, the IFS said. “It is also interesting and useful to say that £25bn 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.”
A further complication is that big chunks of government spending – the NHS, schools and overseas development have been ringfenced from cuts. That has meant even deeper cuts elsewhere in Whitehall. The IFS has estimated that departmental spending will be 17.1% lower in real terms in 2018-19 than it was in 2010-11. Were the ringfencing to continue, the cuts in non-protected departments would be 31.2%. Hence the reports that the next parliament could see spending cuts of close to £50bn.
These numbers are not, of course, set in stone because the next government could make different choices. George Osborne has set a target of running a budget surplus by the end of the next parliament. Neither Labour nor the Liberal Democrats propose being so stringent.
It would be possible for the next government to limit departmental or welfare spending cuts by raising taxes. During the current parliament, more than 80% of deficit reduction has been the result of taking the axe to spending. Back in the summer, the International Monetary Fund suggested that tax increases should also be explored.
This does not entirely rule out the tax cuts Cameron and Osborne have pledged for the next parliament. What it does mean, however, is that they will not come until deep into the next parliament and will necessitate even deeper cuts in spending.
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