How many spending cuts do the two main parties still have to announce? I wish the answer to that question could be dashed off in a few words. But, as recent arguments have demonstrated, the public finances are a muddy and mangled thing. They do not lend themselves to easy summation.
In which case, I shall have to tell a more convoluted story. It could begin as far back as prehistory, when Gordon Brown roamed the Treasury, but let’s make do with the most recent Autumn Statement:
The Coalition’s new fiscal target
Last month, in the wake of the Autumn Statement, the Government published a new Charter for Budget Responsibility. This contained revised targets for the deficit and the national debt. As the latter rests largely on the former, and doesn’t reveal much else about the planned fiscal consolidation, I’ll ignore it in this post.
The Government’s target for the deficit – what it calls its “fiscal mandate” – used to be:
“A forward-looking target to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period.”
But, as of the new Charter, it’s now:
“A forward-looking aim to achieve cyclically-adjusted current balance by the end of the third year of the rolling, 5-year forecast period.”
This, you’ll notice, is stricter than the earlier version. The Government is now effectively committing to bring the cyclically-adjusted current budget (CACB) into balance within three years, rather than within five. Currently, that means the 2017-18 financial year.
The CACB is forecast, by the Office for Budget Responsibility, to be in a surplus of 0.5 per cent of GDP in 2017-18, rising to 2.3 per cent in 2019-20. So the Government is set to meet its revised target. What a happy coincidence.
But what cuts do these forecast surpluses imply? As it happens, the Institute for Fiscal Studies sought to answer this question in a recent – and significant – paper. They calculated that, after the spending cuts and tax hikes that have already been legislated for 2015-16…
“…this leaves a 2.8 per cent of national income reduction in borrowing that has not been fully specified. In the absence of further tax increases or cuts to welfare spending, this would have to be found from cuts to departmental spending. To reduce borrowing by this much would require departmental spending being 14.1 per cent lower in real terms in 2019–20 than it is set to be in 2015–16.”
There’s a pretty clear caveat within that paragraph: “in the absence of further tax increases or cuts to welfare spending…” But that is the nature of fiscal future-gazing. Assumptions and simplifications have to be made, even though the Government’s policy could change in a single statement from the Chancellor.
So let’s go with the IFS’s account for now. The Coalition’s plans imply that there’s another 14.1 per cent of as-yet-unannounced cuts to be made to departmental spending. Which is roughly £55 billion in actual money.
You may have seen that figure bandied about recently.
The two main parties’ fiscal rules
There’s something extremely curious about the Government’s revised fiscal mandate. And it’s this: the two main parties both agree and disagree about it at the same time.
To clarify, the two main parties agree with the fiscal mandate insofar as they are both planning to vote for it in the Commons. But they disagree insofar as they’re both preparing to supplant it with alternative fiscal rules in the next Parliament. That was, after all, the Coalition’s mandate. The Conservatives and Labour would do things differently by themselves.
The IFS sums up the parties’ new fiscal pledges in that same paper. Taking their lead from George Osborne’s 2013 Conference speech, they write:
“The Conservatives have so far pledged that they will achieve an overall budget surplus – i.e. total tax and non-tax revenues in excess of total spending – in the next parliament, provided the recovery is sustained.”
And based on the Collected Works of Eds Miliband and Balls:
“Labour has pledged to achieve a surplus on the current budget and falling national debt in the next parliament.”
There’s still some uncertainty about these rules. For instance, they both jettison the “cyclically-adjusted” part of the existing fiscal mandate, but both the Conservatives and Labour have suggested that they will take account of cyclical fluctuations in the economy. They need to provide more information about how they will do that.
But, for now, let’s again make do with what we’ve got. The most striking thing about these rules is that they could lead to the deficit being reduced more slowly than in the OBR’s latest forecasts. Could, mind.
The Conservatives’ is effectively a pledge to return the entire budget to surplus by 2019-20 at the latest. But the entire budget is already expected – by the OBR, on page 189 of its latest Economic and Fiscal Outlook – to be in a surplus of 1.0 per cent of GDP at the end of the next Parliament. This means that, all other things being equal, a Conservative government could slow the pace of deficit reduction by about 1.0 per cent of GDP and still meet its target.
Labour’s rule is even less stringent. It doesn’t cover the entire budget, but only the “current” part of it; which doesn’t include investment spending, among other things. As it stands, this current budget is expected to be in a surplus of 2.3 per cent of GDP at the end of the next Parliament. And so: they could slow the pace of deficit reduction by about 2.3 per cent of GDP.
How many more cuts do those rules entail?
Remember how I said that fiscal future-gazing means making assumptions? It’s time to make another. Let’s assume that a Conservative or Labour government would take things right to the wire, and only reach their respective budget surpluses in 2019-20. This is the least they need to achieve in order to meet their fiscal targets.
And let’s throw in some other assumptions, as the IFS does in its paper: that both parties would stick with the tax ‘n’ spend policies that have already been announced for 2015-16; that both would keep investment spending around 1.2 per cent of GDP; that the economy will grow as expected; and so on.
How much more fiscal consolidation does this imply for the next Parliament? In the words of the IFS:
“…in the absence of any new policies on tax or social security spending, [the Conservatives’] fiscal rule would imply that they would need to cut departmental spending by (at least) 8.3 per cent in real terms between 2015–16 and 2019–20.”
“…in the absence of any policy announcements on tax or welfare, Labour would need to cut departmental spending by 1.9 per cent in real terms between 2015–16 and 2019–20 in order to achieve exactly a current budget balance in 2019–20.”
This translates to about £30.1 billion more fiscal consolidation for the Tories (in 2015-16 prices), and £6.8 billion for Labour.
And this seems to tally with David Cameron’s own figures, at least in part. His recent interview with Andrew Marr contained the following exchange:
Cameron: …We’ve said there’s another £30 billion of adjustments that needs to be made, some from tax and the rest from spending…
Marr: …I’m interested in the figure you just gave me, the £30 billion or so, because that is much less than the OBR and the IFS, who are working on official figures at the time of the Autumn Statement, suggested, they were talking about £55 billion of cuts still to come…
The £30 billion that the Prime Minister mentioned is derived from the Conservatives’ own fiscal pledge. The £55 billion that Marr mentioned is, as I pointed out above, from the Office for Budget Responsibility’s current forecasts for the Coalition Government.
Which is to say, the television presenter should be careful: with the election approaching, the Tory leader has stopped talking about what the Coalition is promising. Now it’s all about what his own party is promising.
How much has already been announced?
This is where the story takes a particularly controversial turn, as no-one can quite agree on who’s saving what. In that same Marr interview, Cameron rattled off a list of the cuts and tax hikes that the Conservatives hope to make:
“We’ve said five of the £30 billion comes from continuing the war against tax evasion and tax avoidance, that leaves £25 billion, of which £12 billion should be reductions in welfare spending and we’ve already given some answers there, and the remaining £13 billion, that comes from, from continuing for two more years, the reductions and efficiencies in departmental spending, in government departments, along the same lines as what we’ve achieved in the last five years.”
Many of these feature in Policy Exchange’s useful infographic of party policies for after the next election.
But these policies are also disputed by the IFS. Their figures exclude the £5 billion from “continuing the war against tax evasion and tax avoidance,” on the grounds that this is terribly uncertain money. They also point out that only £3 billion of the £12 billion of welfare savings has actually yet been specified – leaving £9 billion of highly contentious cuts to come.
When you count the other tax and welfare promises that have been made – such as raising both the higher-rate threshold and the personal allowance – the situation becomes even more awkward for the Conservatives. The IFS reckons that Osborne has more than wiped out his £3 billion worth of welfare savings. In fact, they think he’s giving away 2.9 billion overall.
The £30 billion of required fiscal consolidation could be closer to £33 billion. Or a 9.1 per cent reduction in departmental spending.
But what about the other £13 billion of cuts from, in Cameron’s words, “continuing for two more years the reductions and efficiencies in departmental spending”? This slightly complicates our assumption, made for the sake of calculation, that the Conservatives would take until 2019-20 to reach their budget surplus. But it’s worth including in this story nonetheless.
As the Prime Minister pointed out, those £13 billion of cuts match the pace of those achieved during this Parliament, when departments have tended to save more than was required of them. We may not know exactly what these Whitehall savings are, but – unlike the welfare cuts – we can be pretty confident that they will happen.
Which leaves us where? In rough figures – which give inadequate consideration to debt interest, among other things – the Conservatives have around £20 billion of savings left to properly identify. That’s the grand total of £33 billion minus the departmental savings of £13 billion that Cameron has promised.
As for Labour, their claims are under dispute too – mostly for the costings that lie behind them. But the fact remains that Miliband and Balls have fewer savings left to identify; in large part because they are making fewer savings. According to the IFS, Labour’s entire panoply of policies will currently save the Exchequer £1.4 billion. That leaves them with just over £5 billion of their £6.8 billion to go. Or a 1.4 per cent reduction in departmental spending.
Do these remaining £billions of unspoken spending cuts represent the Great Deception of the next election? I wouldn’t yet go that far. Both parties still have time to announce more savings, as they should. This wouldn’t just be the honest approach, but also the prudent one. As this current Parliament has shown, fiscal plans can go awry. Neither side should enter Government expecting to do the bare minimum.
Sadly, though, the parties’ calculations may be more political than economic. Will specifying further cuts put off the voters? Will it put off potential coalition partners? Or might it contrast well against their opponents’ evasiveness? These are questions for the strategists to contend with. It seems noteworthy that, since the New Year, the Conservatives have been talking more about Labour’s plans than their own. The double-pronged charge is that Balls would both spend too much and reduce our national debts by too little.
As so often, when it comes to fiscal matters, I suspect it will mostly come down to trust. The Tories can probably get away with being less specific about the spending cuts to come because they are expected to deliver them. Whereas Labour cannot because they are not. The numbers might not even factor. You can disregard everything above.