Autumn Statement: If the Chancellor can’t predict the next six months, who knows what the deficit will be in five years?

Differences between the parties may not be great…. Whoever is running things, the squeeze must continue

Click to follow

You are halfway up the mountain. The first half has been quite a lot tougher than you expected and you thought you would be pretty near the top by now. But you have come a long way and the question is whether the next part of the journey is going to be easier or tougher.

That “big picture” approach is surely the best way to see the stuff we were given in the Autumn Statement. For all the precision of the numbers in the Office for Budget Responsibility’s report, the uncertainties about the next five years remain huge.

The OBR has done its job with its usual competence and impartiality, but it has had to revise both its growth and its revenue forecasts this year by a decent margin – growth up, revenue down. That is not meant to happen, for those are supposed to move in the same direction. If we don’t know enough about economics to be able to forecast accurately what will happen in the next six months, how can we hope to predict what might happen five or more years away?

What we can do is to set the progress of the past five years in its historical context. You can see that in the graph, which shows what has happened to government spending and government revenue as a proportion of GDP since 1948/9, plus some projections to 2018/9. That is 70 years of public finance, pretty much a lifetime and  certainly long enough to grasp what the Coalition has struggled to do.

As you can see, it has not been able to increase revenues. These – the red line – are stuck at around 36 per cent of GDP, much the same level they have been for the past 20 years. The burden of adjustment has fallen overwhelmingly on cutting spending and, on these plans, will continue to do so. Unless you believe that another government could do what no-one has done for 20 years and significantly increase taxes, that is the cash the next government will have to play with.

But now look at the projections for spending, the black line. These suggest spending will be lower than at any time for the past 70 years. You have to question whether that is credible or achievable. Is it what we want? Will there be the continued steady growth over the next five years implicit in these projections, or might another nasty recession come and strike us? Remember how Gordon Brown assumed there would never be another recession and how wrong that turned out to be. The graph looks fine until you realise that the shaded bit on the right is a forecast, not a reality.

 

There is the dilemma for the next government. Can it really aim for a surplus? Germany has managed to balance its budget, but that is a rare achievement. Is there some way the next government could nudge up the tax take, or is the likely gain too small to be worth the political cost? Remember, this is not a £2bn or even £5bn problem. It is more like a £30bn or £50bn one.

Or maybe we can go on cutting public spending. One of the astounding features of the past five years has been the way in which the unprotected spending departments have been able to maintain their quality of service with much less money. It is true that in the boom years they saw a sudden increase in their funding, so you could say they have been trimming the fat they had accumulated. But what has been achieved in many departments, particularly in local government, is really impressive. Most impressive of all, local authorities have been able to build up their reserves, rather than run them down.

Even the “protected” departments have been squeezed, because though they have not seen a real reduction in their resources, demands on them have risen. Thus, the NHS spending per head of population is a tiny bit higher now than it was in 2009/10, but it feels under pressure because a gradually ageing population demands more of it.

Looking ahead, the OBR says that the implied cuts over the next five years:  “would pose a significant challenge if they were confirmed as firm policy”, and you can see what it means. As it observes: “Doubtless, each party will be asked to provide greater details of its plans in the run-up to the general election”.

Actually, the differences between the main parties may not be so great as they might seem. Whoever is running things, the squeeze must continue. George Osborne made much of the fact that the UK is the fastest-growing large developed country. That is good. But we also have the second-largest fiscal deficit in the G7, expressed as a percentage of GDP – second that is to Japan. That is not so good. We are still only half way up the mountain.

Comments