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?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Telesales Executive - OTE £25,000

£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

Recruitment Genius: 1st Line Technical Support Engineer

£19000 - £23000 per annum: Recruitment Genius: This IT and Telecoms company ar...

Recruitment Genius: Assistant Manager - Visitor Fundraising

£23000 per annum: Recruitment Genius: The Visitor Fundraising Team is responsi...

Recruitment Genius: Developer

£30000 - £35000 per annum: Recruitment Genius: This is an opportunity to join ...

Day In a Page

Read Next
An investor looks at an electronic board showing stock information at a brokerage house in Shanghai  

China has exposed the fatal flaws in our liberal economic order

Ann Pettifor
Jeremy Corbyn addresses over a thousand supporters at Middlesbrough Town Hall on August 18, 2015  

Thank God we have the right-wing press to tell us what a disaster Jeremy Corbyn as PM would be

Mark Steel
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future