What does the Chancellor's speech mean for the public finances and state spending?
First the good news: the Office for Budget Responsibility, the Treasury’s official forecaster, has revised up its growth forecasts slightly since March for 2014 and 2015.
However, as the chart shows, it also thinks growth in the following three years will be weaker thanks to a slowing of the global economy:
The OBR was also forced to recognise that, despite higher than expected growth, the fiscal deficit (the amount the Government borrows each year) is not dropping as fast as expected in March, mainly due to disappointing income tax receipts.
The forecaster says borrowing will be higher in this financial year and the next:
However, the OBR also surprised analysts by saying that public borrowing between 2016-17 and 2018-19 will be lower than it expected in March.
The OBR said this downward revision was due to lower welfare outlays and Government interest payments on its debt in the coming years. The mechanism is complicated to describe but, in a nutshell, it turns out that weaker than expected inflation has helped push down the forecast for public borrowing in later years.
As far as the Chancellor’s main target is concerned, the OBR said the Government is still on course. It is projected to run a surplus on day-to-day spending (adjusted for the economic cycle) over the next five years. Indeed, the OBR says the fiscal mandate will still be hit in 2017-18, three years early:
Furthermore, there is now projected to be 2.3 per cent of GDP surplus on this measure of borrowing by 2019-20.
But all this will come at a cost according to the OBR. Public sector day-to-day spending will fall to just 14.1 per cent of GDP in 2017-18. And then the Treasury has pencilled in still further declines, so the share declines to just 12.6 per cent of the economy by the end of the decade:
That’s almost a 50 per cent fall in public service spending over a decade. An increasing number of analysts say that such a massive squeeze will prove impossible for any government to deliver. Many say that either taxes will have to rise or the deficit will have to be closed over a longer period.Reuse content