The Budget of 2018: Future governments will have to learn how to do more with less

For 25 years, tax revenue has been stuck at around 38 per cent of GDP. No government has been able to increase it. That is what we have to work with

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The trudge towards a balanced budget, or something close to it, continues today and we are not making a lot of progress along the path. For however he dresses it up, George Osborne is stuck. After you make all the adjustments, including the transfer of Post Office pension funds to the Treasury, the underlying deficit in the current financial year will turn out to be about the same level as was in the last one. We will get an update tomorrow from the Office for Budget Responsibility but its central estimate three months ago was that there would still be a deficit of 2 per cent of GDP in 2017-18.

So, by the middle of the next parliament, public spending will be back to the same proportion of national income – 39.5 per cent – as it was in 2003-04 and about the long-term average for the UK. You could say that by then things will be back to normal. But the new normal will be very different to the old normal, for though the size of the state will be back to where it was, the way our taxes will be spent will be quite different, as some work by the Institute for Fiscal Studies shows.

If its figures are broadly right, and they do assume there will be a reasonable recovery, the Government will have just under £700bn to spend. That will compare with £570bn in 2003-04, a rise of some 22 per cent, but the economy ought to be that much bigger by then. However, the money will be spent very differently. The biggest change will be debt interest, which accounted for only 5 per cent of spending in the earlier period but is set to rise to 9 per cent by 2017-18. Pensions will go up from 14 per cent to 16 per cent of spending, and healthcare from 18 per cent to 20 per cent. Other social security spending does rise in real terms but falls just slightly as a proportion of public spending, from 14 per cent to 13 per cent.

Everything else is squeezed – education, police, the armed forces, the whole caboodle. As the Institute for Fiscal Studies comments: “We are moving ever more rapidly towards a state focused on welfare, particularly on health and pensions. As the population ages, this focus on health and pensions will become still more evident. However, whether spending a diminishing fraction of national income on other public services is a sustainable choice is an open question.”

That must be the right thing to ask. One response would be to say that the ring fence around the NHS and foreign aid must be breached. But there are obvious problems with that. It may be that the NHS could achieve increases in efficiency and so contain its costs better and foreign aid could focus on outcomes rather than inputs. But it is hard to see the savings being enough to transform public finances.

Another response would be to increase the proportion of national income raised in taxation. For 25 years, tax revenue has been stuck at around 38 per cent of GDP. No government has been able to increase it. So unless you believe there is greater willingness now than at any time in the past generation to pay more tax, that is what future governments will have to work with.

Gradually, I think our politics will shift to reflect this idea that there will be a fixed amount of money available and that governments will have to do the best they can with it. It is a different narrative from the one that our present generation of politicians has grown up with, and a particularly sharp contrast to the rhetoric of the last Labour government in its final years – though not in its first period of office. I don’t expect much shift today. But I was encouraged by one recent story. Danny Boyle has just revealed that he nearly resigned from designing the Olympic ceremony because of penny-pinching by the organisers. But he created an utter triumph. Government has to learn the same trick: doing more with less.

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