By Richard Johnstone | 4 December 2014
Spending cuts on a ‘colossal scale’ are being made in a bid to get the public finances into balance by 2018/19, the Institute for Fiscal Studies has said.
Publishing its analysis of Chancellor George Osborne’s Autumn Statement, the think-tank said plans announced yesterday quickened spending cuts after the next election, as well as indicating real-terms cuts planned in 2019/20 for the first time.
Cuts in the current parliament equated to a 2.2% average annual reduction for Whitehall departments, although the NHS, schools and international development were protected, meaning many areas faced higher reductions.
Based on the figures set out in the Autumn Statement, the IFS concluded reductions proposed over the next parliament from 2014/15 to 2019/20 would equate to 3.2% each year.
IFS director Paul Johnson said these plans would take total government spending to its lowest level as a proportion of national income since before the Second World War and may require a ‘fundamental reimagining of the state’.
‘As ever there are different ways of looking at the scale of cuts,’ he stated.
‘If you look at total government spending less spending on debt interest, a measure the prime minister has used at times, then spending is down by £11bn in the four years to 2014/15, and is due to fall a further £38bn in the five years to 2019/20. The relatively modest fall over this parliament is largely explained by increased spending on social security, especially pensions.
‘If you look specifically at spending by Whitehall departments, then about £35bn of cuts have happened, with £55bn to come.’
Additional savings on welfare spending, or tax increases, could reduce the amount that needs to be cut from departments, he added.
‘We calculate that, just to keep the pace of departmental spending cuts over the next parliament to that which has been achieved over this parliament would require welfare cuts and/or tax rises of about £21bn a year by 2019/20.’
Addressing why the chancellor has not been able to meet his 2010 target of closing the deficit in one parliament, Johnson said that it was ‘emphatically not’ because the government has failed to impose the intended spending cuts.
‘It is because the economy performed so poorly in the first half of the parliament, hitting revenues very hard. Unless the government could have found some economic magic which would have made a substantial difference to growth over the last few years, the only way it could have presided over a greater fall in the deficit would have been to cut spending harder or to raise taxes further.
‘Looking forward, the forecasts imply reaching cyclically adjusted current budget surplus in 2017/18, overall balance in 2018/19 and, supposedly, an overall surplus of £23bn by 2019/20.’
Johnson argued it was incumbent upon politicians taking this action to set out the implications of this deficit-reduction plan.
‘How will these cuts be implemented? What will local government, the defence force, the transport system, look like in this world? Is this a fundamental reimagining of the role of the state?’
Changes to stamp duty in the statement, which removed the large jump in rates at different prices, were welcome but rather modest, the think-tank concluded.
‘They are welcome because they remove the absurd slab structure which, at the extreme, could result in a £40,000 additional tax bill accompanying a £1 increase in sale price,’ Johnson added.
‘They are modest because they leave the system as a whole largely intact, raising large sums of money, and distorting the housing market.
‘Transaction taxes such as stamp duty are highly inefficient however they are designed and the truth is stamp duty will continue to become a more important revenue raiser not a less important one even after these changes.’
