08 November 2016

Institute for Fiscal Studies: Winter is Coming: the outlook for the public finances in the 2016 Autumn Statement

Prior to the referendum the public finance challenge facing the UK already looked far from easy. Two out of the three fiscal targets that the new Conservative Government set itself had already been breached and further net tax rises, benefit cuts and real cuts to spending on public services – which will not be easy to deliver – were planned for the remainder of this parliament in order to try to eliminate a still relatively high budget deficit by 2019–20. And there was a further longer-term public finance challenge caused by the financial costs of an ageing population.

But since then the referendum result has led to the Government abandoning its other fiscal target and virtually all leading economic forecasters – including the Bank of England – substantially revising down their forecasts for economic growth. If correct this worsens the UK’s public finance position. This briefing note attempts to quantify how much greater the public finance challenge might be, taking into account not just the latest macroeconomic forecasts but also the movements in gilt rates, equity markets and oil prices seen since the last Budget and the scope for a cut to public spending as a result of no longer having to make a net financial contribution to the EU budget. [...]

Conclusion

[...] our estimate is that we might expect the OBR to revise up its forecast for government borrowing in 2019–20 by around £25 billion, so that instead of a surplus of £10.4 billion we might now expect a deficit of around £15 billion. This does not mean that that the Chancellor should implement further tax rises or spending cuts, on top of those already planned, worth a total of £25 billion in the next few years. He could sensibly choose not to – indeed there may be a case for a temporary fiscal stimulus – and still expect to have a balance on the current budget in three years time (which was the rolling fiscal target put in place by the coalition government prior to the last general election). But doing this would leave us on course to miss the now abandoned, but still legislated, commitment to eliminate the budget deficit from 2019–20 onwards. This is in addition to the Conservative Government having managed, in just months following the general election, to break both the other two fiscal targets that it set itself.

Another reason for the Chancellor to wait before implementing any further fiscal tightening is that there is even more economic uncertainty than usual. But building a plan for further austerity in the next parliament would be prudent. Indeed even if a balanced Conclusions  Institute for Fiscal Studies 49 headline budget was delivered in 2020–21 and then maintained thereafter public sector net debt would not be on course to reach its pre-crisis level of 40% of national income until around the mid-2040s. Unfortunately if anything the £25 billion estimated deterioration in the public finances in 2019–20 is likely to understate the increase in the longer-term challenge that has occurred since the March Budget. The OBR’s previous long-run projections were based on an optimistic assumption about NHS productivity growth which they have recently said is likely to be revised down in their future projections. More fundamentally any reduction in future immigration, any reduction in longer-term growth or any increase in future interest rates would make the fiscal arithmetic harder still. 

Full note

© IFS - Institute for Fiscal Studies