Government spending to be lower than planned, IFS finds

1 Feb 12
The government is set to underspend by £3bn this year in addition to its planned cuts, the Institute for Fiscal Studies said today.

By Richard Johnstone | 1 February 2012

The government is set to underspend by £3bn this year in addition to its planned cuts, the Institute for Fiscal Studies said today.

IFS director Paul Johnson

Its Green Budget analysis of the UK’s finances also found that local government spending (excluding education) would fall by around 10% in real terms between 2009/10 and 2011/12.

The economic think-tank estimates that public sector net borrowing for the current year will be around £124.2bn, £2.9bn less than the latest official forecast by the Office for Budget Responsibility.

Coming seven weeks before Chancellor George Osborne announces his Budget on March 21, the Green Budget said the argument for a short-term tax cut to boost the economy was stronger than it was a year ago.

IFS programme director Gemma Tetlow said that the case for a ‘timely, targeted and temporary’ fiscal stimulus of between £10bn–£20bn could be made as the short-term outlook for the economy has worsened. Latest figures show that the economy shrank in the last quarter of 2011, leading to concerns that the UK is back in recession.

A temporary cut to VAT would have the largest economic impact, Tetlow said. More spending on investment projects by government would also be a way to target funds.

However, she added that although the case for a fresh stimulus was stronger now, it was ‘not clear cut’. Such a stimulus might hit investor confidence, leading to higher interest rates for government borrowing when there is a need to raise £740bn of government debt in the next five years.

The IFS also reiterated previous warnings that the scale of the government’s planned cuts was ‘daunting’, and represented the biggest sustained UK cuts programme since the Second World War. By the end of 2011/12, only 6% of the planned cuts to public service spending will have been implemented, the think-tank noted.

IFS director Paul Johnson said: ‘The chancellor faces his third Budget with the economy and public finances in considerably weaker shape than he had hoped a year ago. While it looks as though central government is going to underspend against tight spending plans, this neither leaves much space for any permanent fiscal loosening nor avoids the fact that the vast majority of the planned – and unprecedentedly big – public service cuts are still to come.’

Based on current plans, the report’s forecast for economic growth in 2012 is 0.3%. This projection, by Oxford Economics, is less than half the OBR’s projection of 0.7%.

Johnson added that there was a risk that the economy might do worse than expected as a result of the eurozone crisis, and if the single currency were to break up.

On local government spending, the report confirmed a 10% real terms drop over the past two years. It echoed the conclusions of the Joseph Rowntree Foundation last week that these cuts are not evenly distributed.

The IFS said that spending cuts have been larger in areas of the country with relatively high spending, such as urban and poorer parts of England, than in more affluent rural and suburban districts.

Council cuts have led to severe reductions in spending on planning and development, which is set to fall by 43% over the two years. So far, spending on social care has been relatively protected, falling by just 4%.

CIPFA, which helped the IFS compile the figures on local government spending, warned that the localisation of business rates could make things even more difficult for councils that had already been hardest hit by spending reductions.

CIPFA’s assistant director of local government, Alison Scott, added: ‘The success of localising business rates will depend to a large extent on them being able to attract business and for those businesses to prosper. Managing significant cuts in a slow economy will make this an especially difficult task for councils in less affluent areas around the country.’


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