Pace of spending cuts set to speed up, IFS predicts

8 Feb 17

The pace of government spending cuts is set to quicken under Philip Hammond’s plans to move the public finances into surplus, according to an analysis by the Institute for Fiscal Studies.

The IFS Green Budget, published yesterday, found that Hammond’s decision to stick with George Osborne’s plans for day-to-day departmental spending would result in around 4% in cuts in resource spending between 2016-17 and 2019-20.

This comes after government spending fell very little over the last three years, according to the IFS, although real-terms spending on public services has fallen by 10% since 2009-10 – by far the longest and biggest fall in public service spending on record.

However, government policy to protect spending on the NHS, pensions and overseas aid means that the impact has been different across departments.

By 2019–20, real departmental spending is due to be 13% lower than it was in 2010–11, with cuts of around 40% to the justice, business, culture and environment budgets. In 2020-21, spending on health, pensions and overseas aid will all be higher as a share of national income than before the 2008 financial crisis, while spending on schools, defence and, especially, public order and safety, will be lower.

The report also found that tax as a share of national income is rising and would reach 37% by the end of the decade, its highest level since 1986-87.

IFS director Paul Johnson said that, for all the focus on Brexit, the public finances would be defined in the next few years by the spending cuts announced by Osborne.
“Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise,” he stated.

“Even so the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament. Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

Under Hammond’s plans, the government will no longer seek to deliver a surplus in 2019-20 but instead aim for the public finances to be returned to balance as early as possible in the next Parliament, and that borrowing (adjusted to reflect the economic cycle) should be below 2% by 2020.

Hammond remains committed to his predecessor’s plans for cutting day-to-day public service spending, but the IFS said that to meet these would require a particularly sharp cut in 2019–20, immediately prior to the next general election.

To get the public finances into surplus will require an additional consolidation of up to £34bn, extending the period of spending cuts and tax rises well in to the 2020s, according to the IFS.

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