prospects for public sector finances: the squeeze on spending continues … · 2014. 11. 28. ·...
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Prospects for public sector finances: the squeeze on spending continues Gemma Tetlow
Presentation to the CIPFA Pensions Network CFO Briefing
24 November 2014, London
© Institute for Fiscal Studies
Overview of the public finance situation
• Financial crisis and recession revealed large structural deficit
– Necessitated active policy response to reduce borrowing from a post-World War II high of 10.2% of GDP
• Roughly halfway through a large fiscal consolidation
– Budget plans imply deep spending cuts through to 2018–19 in order to eliminate the deficit in that year
– Spending cuts and tax rises have largely been implemented as planned so far but weak growth has meant deficit has not fallen as forecast in 2010
• Parties differ somewhat in their objectives for reducing borrowing
– None have given much detail about how this will be achieved
• Potential developments in the Autumn Statement
– Tax revenues have been weaker than forecast so far this year, despite growth turning out largely as expected
– Is this a temporary or permanent phenomenon? © Institute for Fiscal Studies
Spending and revenues, without action
30
35
40
45
50
55
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
© Institute for Fiscal Studies
Public sector receipts and total managed expenditure, 1997 to 2018
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Spending and revenues, without action
30
35
40
45
50
55
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
Revenues - without action Spending - without action
© Institute for Fiscal Studies Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Public sector receipts and total managed expenditure, 1997 to 2018
The policy response
-2
0
2
4
6
8
10
12 2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
Other current spend
Debt interest
Benefit spend
Investment spend
Tax
© Institute for Fiscal Studies Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
March 2014: 8.8% national income (£152bn) hole in public finances,
offset by 10.3% national income (£178bn) consolidation over 9 years
12% from tax rises
8% from investment spending cuts
14% from welfare spending cuts
52% from other current spending
Spending and revenues, with action
30
35
40
45
50
55
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
Revenues - without action Spending - without action
Revenues - with action Spending - with action
© Institute for Fiscal Studies
Now aiming for tighter
fiscal position than
planned pre-crisis
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Public sector receipts and total managed expenditure, 1997 to 2018
Spending and revenues, with action
30
35
40
45
50
55
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
Revenues - without action Spending - without action
Revenues - with action Spending - with action
© Institute for Fiscal Studies Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Implies tax burden
slightly above pre-crisis
level and at 30 year high
Public sector receipts and total managed expenditure, 1997 to 2018
Spending and revenues, with action
30
35
40
45
50
55
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
Revenues - without action Spending - without action
Revenues - with action Spending - with action
© Institute for Fiscal Studies Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Implies total spending
back to 2002 levels,
but….
Public sector receipts and total managed expenditure, 1997 to 2018
… high spending on social security and debt interest implies relatively little for public services
• Public service spending reduced to the share of national income seen at the end of the 1990s (technically: lowest since at least 1948)
0
5
10
15
20
25
30
35
40
1948–49
1951–52
1954–55
1957–58
1960–61
1963–64
1966–67
1969–70
1972–73
1975–76
1978–79
1981–82
1984–85
1987–88
1990–91
1993–94
1996–97
1999–00
2002–03
2005–06
2008–09
2011–12
2014–15
2017–18 %
of
nati
on
al in
co
me
© Institute for Fiscal Studies
Note: Figure shows total public spending less spending on social security benefits
and debt interest.
Deficit reduction: have they stuck to the plan?
-20
0
20
40
60
80
100
120
140
160
180
Pu
bli
c s
ecto
r n
et
bo
rro
win
g
(£ b
illi
on
)
Financial year
March 2014 Budget (old basis)
March 2014 Budget (new basis)
June 2010 Budget (old basis)
© Institute for Fiscal Studies Source: Office for National Statistics and Office for Budget Responsibility.
-2
0
2
4
6
8
10
12 2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
% o
f n
ati
on
al in
co
me
Budget 2014 Budget June 2010
© Institute for Fiscal Studies
Originally planned tax increases and spending cuts delivered but more announced...
Planned cuts to public spending
Based on current plans from Budget 2014:
Between 2010–11 and 2018–19 and after economy-wide inflation
• Total spending cuts of 5%
• But
– debt interest spending rising
– social security spending, particularly on pensioners, rising
– other non-departmental spending such as on PAYG spending on public service pensions and UK contribution to the EU budget rising
• Departmental spending on public services to be cut by 20%
© Institute for Fiscal Studies
Whitehall departments: ‘winners’
-11.0
-10.4
-8.2
-7.4
4.3
9.4
35.3
-80 -60 -40 -20 0 20 40
Total DEL
Defence
Education
Transport
NHS (Health)
Energy and Climate Change
International Development
Real budget increase 2010–11 to 2015–16
© Institute for Fiscal Studies
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Whitehall departments: ‘losers’
-11.0
-35.4
-35.3
-33.4
-30.3
-28.8
-28.4
-19.1
-59.5
-80 -60 -40 -20 0 20 40
CLG Communities
Work and Pensions
Justice
Culture, Media and Sport
Environment, Food and Rural …
Home Office
CLG Local Government
Business, Innovation and Skills
Total DEL
Real budget increase 2010–11 to 2015–16
© Institute for Fiscal Studies
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
Source: Emmerson and Tetlow (2014), http://www.ifs.org.uk/publications/7238
Departmental spending cuts not set in stone (1)
• Detailed plans for spending in 2015–16 set out in Spending Review 2013
– Conservatives, Labour and Liberal Democrats have all said they would stick to these levels of (current) spending
• Departmental spending beyond 2015–16 not explicitly planned
– Equals planned total spending less OBR forecasts for social security and other non-departmental spending
Changes in these will have implications for departmental spending
© Institute for Fiscal Studies
Departmental spending cuts not set in stone (2)
• Could choose to cut social security further
– £12 billion would reduce departmental spending cuts between 2015–16 and 2018–19 to the same rate as over 2010–11 to 2015–16
– Cut to DEL of 17% between 2010–11 and 2018–19
– If NHS, schools and aid remain protected from cuts then ‘unprotected’ areas would face cuts averaging 31%
– £12 billion equivalent to 6% of all social security spending, 11% of non-pension spending, or 13% of spending on non-pensioners
• Could choose to have a higher level of total spending
– Labour and Liberal Democrats have suggested they would be happy with a higher level of borrowing than currently planned for
– Could spend around £26 billion a year more by 2018–19 and still achieve their suggested deficit targets
– Cut to DEL of 13% between 2010–11 and 2018–19 © Institute for Fiscal Studies
Are these cuts deliverable? A reason to think yes...
• Government departments have (more than) delivered the budget cuts required in 2010–11, 2011–12, 2012–13 and 2013–14
– likely that political cost of over-spending means that departments treat their budgets as a cap rather than a target
Suggests mechanism is there: departments look like they can deliver the spending cuts if they are required to...
– (though this will get harder!)
© Institute for Fiscal Studies
Are these cuts deliverable? A reason to think no...
© Institute for Fiscal Studies
• But would a future government want to stick to these plans once the associated fall in service provision and/or quality becomes more apparent?
• Large cuts to public service spending still to come
– these are likely to get harder/more painful to deliver
• The above figures also understate the squeeze on spending
– additional spending commitments
– demographic pressures
Additional spending commitments with no, or only temporary, additional funding
• Budget 2013
– Ending contracting out into DB pensions increases public sector employer NICs (£3.3 billion a year)
– Dilnot reform to social care funding (£1.0 billion)
– Tax-free childcare scheme (£0.8 billion)
• Autumn Statement 2013
– Extension of free school meals (£0.8 billion)
– Scrapping cap on HE student numbers (£0.7 billion)
– Energy prices and efficiency measures (£0.4 billion)
• Budget 2014
– Higher contributions to public service pensions (£1 billion)
• Adds up to £8 billion (around 2% of departmental spending) to be found from within departmental spending
© Institute for Fiscal Studies
Demographic pressures
• Population increasing which increases demand for public services
– ONS projects population will grow by 5.6% (3.5 million) between 2010 and 2018
• Public service spending forecast to fall by average 1.7% per year 2010–11 to 2018–19 but spending per person to fall by 2.4%
• Population also ageing which puts particular pressure on public services used more by older people
– ONS projects population aged 65 and over will grow by 20.0% (2.0 million) between 2010 and 2018
• For example: real freeze in NHS spending between 2010–11 and 2018–19 would actually be a 9.1% cut in real age-adjusted NHS spending per person
– NHS may be ‘protected’ but still considerable squeeze
© Institute for Fiscal Studies
Demographic pressure on the NHS budget
© Institute for Fiscal Studies
86
88
90
92
94
96
98
100
102
20
10–
11
20
11–
12
20
12
–1
3
20
13
–1
4
20
14
–1
5
20
15
–1
6
2016–17
20
17
–1
8
20
18
–1
9
Indexed r
eal te
rms s
pendin
g
20
10
–11 =
100
NHS spending
...per person
...per age-adjusted person
5.6% drop in
per-capita real
spending 9.1% drop in
per-capita age
adjusted real
spending
Summary
• Financial crisis and recession revealed large structural deficit
– Necessitated active policy response to reduce borrowing from a post-World War II high of 10.2% of GDP
• Roughly halfway through a large fiscal consolidation
– Budget plans imply deep spending cuts through to 2018–19 in order to eliminate the deficit in that year
– Spending cuts and tax rises have largely been implemented as planned so far but weak growth has meant deficit has not fallen as forecast in 2010
• Parties differ somewhat in their objectives for reducing borrowing
– None have given much detail about how this will be achieved
• Potential developments in the Autumn Statement
– Tax revenues have been weaker than forecast so far this year, despite growth turning out largely as expected
– Is this a temporary or permanent phenomenon? © Institute for Fiscal Studies
Prospects for public sector finances: the squeeze on spending continues Gemma Tetlow
Presentation to the CIPFA Pensions Network CFO Briefing
24 November 2014, London
© Institute for Fiscal Studies