Politics is all very well, but it’s the maths that matters

The forthcoming Budget can be seen as a template into which the next  government must fit its plans; and the numbers are pretty depressing

Share

We are on the glide-path to the Budget, now just over two weeks away.

This will be the last substantive Budget before the general election next year, for the March 2015 version will really be no more than an election pitch. The opinion polls will tell us whether there is any chance that its proposals will be put into practice. Indeed, given the past form of George Osborne (pictured), expect this one to have a strong political spin to it.

But politics don’t change mathematics. The harsh maths that will face the next government, whoever forms it, will be that we are only half way along the path of fiscal consolidation. So, I suggest the best way to see this Budget is less as a statement about the Chancellor’s intentions and more as a template into which the next government will have to fit its plans. We will catch a glimpse of the future.

Some figures, rather depressing ones I’m afraid: if you look at the Autumn Statement of 2010, by which time the coalition had taken a decent look at the books, it forecasts that this financial year would see a budget deficit of £60bn. Actually (and allowing for changes in accounting practice) it will be about £111bn. Next financial year, the one that begins next month, the deficit was supposed to be down to £35bn. The most recent Office for Budget Responsibility estimates are that it will be £96bn. The Government inherited a deficit of £148bn. Leave aside the target of a surplus, if you say it had to get the deficit to an acceptable level of say £25bn, it has done less than half the job.

So, the next government will have to do what this one has done, but all over again. That leads to two questions that should be at the back of everyone’s mind when the Chancellor stands up. The first is: will faster growth make the task much easier, or only a little easier? The second is: what are the uncertainties on both the revenue and the spending side that might help narrow, or widen, the gap?

A word about each.

In the past, once the UK economy has picked up a bit of pace it really thumped out the revenue. But if the early stages of a boom have usually been good for public finances, this time around, so far at least, the revenue is a bit disappointing. Revenue to the end of January was up 5.2 per cent at £481bn, which is all right. But income tax, the biggest single source of revenue, was up only 3.2 per cent, and company profits tax was down. We have put on some 800,000 jobs over the past year but because pay is rising so slowly the government is not getting as much income tax as you might expect. As growth broadens and strengthens, pay, profits and employment will all pick up further, but we really need three years of 3 per cent growth before we can say that the recovery is pulling us out of the fiscal hole.

Let’s assume we get that – or rather we should look closely at the robustness of the Office for Budget Responsibility growth forecasts, which will be pretty strong. Where are the uncertainties?

On the revenue side, the most serious is that we are dangerously dependent on high earners, with the top 1 per cent of our income-tax payers contributing nearly 30 per cent of the total. It may sound odd to say it, but looking ahead over the next parliament, the exchequer very much needs the highly paid to be paid even more. As the Institute for Fiscal Studies observed in its Green Budget, the paper it prepares each year ahead of the Budget: “The increase in revenues over the next five years is forecast to come largely from income tax and capital taxes.” So, the Government is increasingly dependent on the income and tax behaviour of some 300,000 people, and to a far greater extent than 10 or even five years ago.

On the spending side, the uncertainty is whether the Government can sustain the squeeze. To put this in context, between 1979 and 1997 Gross Domestic Product (GDP) went up in real terms by an average of 2.7 per cent a year, but public-service spending went up by only 1.2 per cent a year. Then from 1997 to the peak of 2007, GDP went up by 3.2 per cent a year but spending went up 4.9 per cent a year. From 2010, when the coalition took over, through to the end of the present plan in 2018, GDP is projected to rise 1.9 per cent a year but spending will fall 1.7 per cent a year. Can it be done?

There are two broad views. One is to say that government departments have so far managed to underspend their budgets and, despite the cuts, have maintained services. (Some argue that those squeezed hardest have done best on this score.) So they should be able to find further  efficiencies. The other view is to note that the population is rising and ageing; that the easiest  savings come first; and that  people expect better services, not worse, particularly in health and education.

We can’t know. What we can see, though, is that if the first stage of fixing public finances was a desperate repair job, the next will be to figure out what sort of government we want – and what can we persuade people to pay for.

React Now

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

Recruitment Genius: Account Manager

£20000 - £35000 per annum: Recruitment Genius: This full service social media ...

Recruitment Genius: Data Analyst - Online Marketing

£24000 - £35000 per annum: Recruitment Genius: We are 'Changemakers in retail'...

Austen Lloyd: Senior Residential Conveyancer

Very Competitive: Austen Lloyd: Senior Conveyancer - South West We are see...

Austen Lloyd: Residential / Commercial Property Solicitor

Excellent Salary: Austen Lloyd: DORSET MARKET TOWN - SENIOR PROPERTY SOLICITOR...

Day In a Page

Read Next
RIP Voicemail?  

Voicemail has got me out of some tight corners, so let's not abandon it

Simon Kelner
A sculpture illustrating the WW1 Christmas Truce football match in Liverpool  

It's been 100 years since the Christmas Truce, but football is still changing the world

Jim Murphy and Dan Jarvis
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there