George Osborne is not the only one who will cut welfare. The numbers can’t add up otherwise

Even two more years of decent growth will not close the gap in the public finances

Share

So George Osborne promises another £25bn of spending cuts after the election, mostly from welfare, while David Cameron promises to keep the “triple lock” on the state pension. Ed Balls acknowledges that there will have to be some further reductions in spending after 2015, but that these will be fairer than those proposed by the Tories. What’s up?

Well, the economics behind all this is that the debate has shifted from cyclical to structural. Until recently, it was all about the cycle. Why was published growth so low? Why was the rise in living standards so weak? To what extent was feeble growth the reason for slow progress on cutting the fiscal deficit? Or were efforts to reduce the deficit the cause, at least in part, of the slow growth?

That debate is now more or less settled. The cyclical recovery is secure. The deficit is coming down again. Employment, already much stronger than expected, is at an all-time high. The triple-dip never happened and even the double-dip has been revised away. Critics of the Coalition argue, correctly, that this has all taken two years longer than the Government expected. Supporters argue, correctly, that the recession was even deeper than initially estimated and the external environment, particularly in Europe, far worse than envisaged. There are concerns about the nature of the recovery, supported as it is by rising house prices, but no one really doubts that it is under way.

The trouble is that, even with a strong recovery and even with the tax increases and spending cuts that are in the pipeline, we still have a deficit. Worse, we will continue to have one during the next parliament. There is a structural problem as well as a cyclical one.

This not a new issue, for we now know that the last government went into the recession with a structural deficit of some 4 per cent of GDP. It was running a deficit at the top of the boom, when it should have been running a surplus. To be fair, the scale of this mismanagement was not fully apparent at the time, and I don’t think even now Ed Balls would fully accept the scale of the error. The problem remains: even were our economy at full tilt, the government would still be running a deficit. The next government has to correct this, either by cutting spending or by increasing tax revenues, or maybe by doing both.

To grasp the scale of the problem, look at these numbers. This financial year, the one that ends in April, total government revenues will be around £600bn. By 2016/17, the first full fiscal year after the election, revenues are projected to be above £700bn. But spending this year will be more than £700bn, and in 2016/17 it is projected at more than £750bn. Even two more years of decent growth will not close the gap. What, then, do you do?

I suppose that the next government could hope the numbers will turn out better, but it cannot assume so. It could continue to borrow, but we are already spending £50bn a year on interest and rates are sure to go up. It could increase taxes, but over the past 25 years revenues have stuck at about 37 to 38 per cent of GDP, so to do so would be to do something that no government – Tory, Labour or coalition – has done since the 1980s, when revenues were boosted by the peak of North Sea oil. (Actually, the present tax-gathering plans are towards the top end of this scale.)

So there have to be cuts in spending, or rather cuts in planned spending, because actual spending will continue to climb. Where can those cuts be found?

To oversimplify a bit, spending is in two chunks. Roughly half is on government services: health, education, defence, police, administration, and so on. The other half is recycled. Money arrives in taxes and National Insurance and goes straight out again in pensions, unemployment benefits and other welfare payments.

Present plans are for the services part to go on being squeezed down, and since the NHS cannot really be squeezed at all, there is huge pressure on everything else. Realistically, it will be very hard to crunch anything more out of this area. Even hitting present targets will be a nightmare.

So the next government, of whatever colour, will have to try to contain the recycling part of public spending – what is loosely called social security. But that will be a nightmare too, because half of that spending is on pensions, and they cannot be touched.

That was the significance of the Prime Minister’s commitment on the triple lock, endorsed by Labour. Pensioners vote. So the only area that can be cut, and this is the significance of the Chancellor’s comments, is spending on other welfare benefits. Labour would be most reluctant to be seen to be cutting those, but it is hard to see what else it could do.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

Commercial Litigation Associate

Highly Attractive Package: Austen Lloyd: CITY - COMMERCIAL LITIGATION - GLOBAL...

Systems Manager - Dynamics AX

£65000 - £75000 per annum + Benefits: Progressive Recruitment: The client is a...

Service Delivery Manager (Software Development, Testing)

£40000 - £45000 per annum: Ashdown Group: A well-established software house ba...

Day In a Page

Read Next
The economy expanded by 0.8 per cent in the second quarter of 2014  

British economy: Government hails the latest GDP figures, but there is still room for skepticism over this 'glorious recovery'

Ben Chu
Comedy queen: Miranda Hart has said that she is excited about working on the new film  

There is no such thing as a middle-class laugh

David Lister
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform