Fiscal loosening ‘initially protected most people from the impact of the recession’ but ‘now we face five years of paying for it’, Institute for Fiscal Studies director Paul Johnson told the CIPFA conference this morning.
Real earnings are falling significantly, after a long period of income growth, he said. They fell by 4% in 2010/11, and by 2014 might be no higher than they were in 2002.The IFS estimates that tax increases will cut household incomes by 5% by 2014. And the changes to indexation rules from the Retail Prices Index to the Consumer Prices Index will have a big impact on benefits.
‘This may explain why the country is rebuilding its balance sheets and moving into “savings mode” faster than expected,’ Johnson told delegates.
Meanwhile, public services face their biggest squeeze for half a century. The government’s plans to eliminate the deficit by 2015 mean a £98bn fiscal tightening. ‘There is no period since the war that looks anything like the level of cuts in the next five years,’ he said.
Overall, departments face average cuts of 12% by 2014/15. But there are some relative winners, he noted, such as international development and energy and climate change.
The shape of the state is likely to radically change in the next five years, said Johnson, ‘something that has not been noticed or debated that much’.
Spending on the NHS, at 30% of the total by 2015, will dominate, followed by schools expenditure. Much less proportionally will be spent on defence, higher education, policing and local government services.
‘This high level of spending on health is unusual by international standards,’ said Johnson. Big reforms to state spending are being attempted by the government; not just – with some difficulty – to the NHS, but also to welfare, pay and pensions, and higher education, he added.
‘But there are questions about deliverability,’ he warned. ‘The dangers to the public finance plans come not just from reduced growth, but also from issues about their unpopularity and potential loss of credibility.’
Not
that things would have been very different under the previous government’s
plans, he told the conference. ‘The cuts would have been a bit less radical,
but within the same order of magnitude.’
To view the Paul Johnson's slides from this session click here
