The Conservative Party’s commitment to run a budget surplus by the end of the next Parliament has profound implications for public services. Local government, in particular, can expect cuts that go well beyond what we have seen so far
Chancellor George Osborne’s commitment to run a budget surplus by 2020 is a radical statement of intent. Table B.5 of this year’s Budget suggests that public sector receipts (mostly taxes and National Insurance Contributions) will be equivalent to 38.4% of GDP in 2013-14. Total managed expenditure (TME) is projected at 45.2% of GDP, leaving a gap (public sector net borrowing) equivalent to 6.8% of GDP.
By 2017-18, the furthest year for which there were projections in the 2013 Budget, receipts are shown at 38.3% of GDP and TME at 40.5%, requiring borrowing equivalent to 2.2% GDP.
The total taken by taxes and NICs as a share of GDP has proved remarkably consistent over time. Chancellors have found resistance to increasing the share much above 38%, largely because to do so would require households on average or just-above average incomes to pay more as a share of their income. ‘We are the 99%’ politics makes it harder than ever to nudge up the amount of tax paid by individuals or small companies.
Thus, if the UK government’s budget is to be run at a surplus, it is a mathematical certainty that if taxes remain at broadly 38% of GDP, then public expenditure will have to drop to around (or somewhat below) that figure. It is always possible that asset sales and other items might give the Chancellor a bit of leeway, but it seems safer to plan on the assumption that public expenditure would have to shrink to between 36% and 37% of GDP by the early 2020s.
Such levels would take spending as a share of GDP to broadly where it was in the late 1980s and again in the early Blair years, when Labour committed itself to stick to Kenneth Clarke’s pre-election spending plans. It would also be close to the share achieved by the Harold Macmillan government of the late-1950s. There would be profound implications for all services.
Projections from the Office for Budget Responsibility published in July 2013 (in Fiscal sustainability report supplementary tables, Table 1.1) imply NHS spending could fall from 8.1% of GDP today to 6.9% in 2020, with education falling from 5.4 per cent in 2013-14 to perhaps 4.5% in 2020. Spending on health and schools might be held in real terms, but it would shrink as a proportion of the economy.
Local government would need to be cut well below today’s already-reduced spending levels. Even if such projections are modestly adjusted over time, they tell a stark story.
Labour would face a challenging environment if they won the 2015 election. There would still be a deficit equivalent to 5% of GDP. Public services would all be expecting Labour leader Ed Miliband to bring an immediate end to austerity.
Yet it is inconceivable most services could all be given anything like the kind of real increases enjoyed during the 2000-2008 period. Either taxes would have to rise, or spending pressures would continue to be almost as intense as under the Coalition.
Osborne has committed himself to a path of continuing public sector austerity until 2020 and beyond. Shadow chancellor Ed Balls faces a bleak choice between that and slightly-less-bad austerity.
