The Budget shows austerity isn’t over – yet

30 Oct 18

The chancellor hasn’t ended austerity. And he’s also missed the opportunity to have an honest conversation with the public about how he plans to pay for public services, says the Institute for Government’s Gemma Tetlow.

It was billed as the Budget to end austerity. In the short term, Philip Hammond’s third Budget did deliver on a narrow interpretation of this objective. But the announcement did nothing to resolve the longer-term mismatch between the UK public’s expectations of public services and welfare and the amount of revenue that can be raised by current taxes.

The Office for Budget Responsibility – the official fiscal watchdog – revised its forecasts for borrowing down substantially. If the government had not made any changes to policy, annual borrowing would now be expected to be £12bn lower this year than previously predicted, and £18bn lower in 2022-23.

This good news is enough to pay for the NHS’s 70th birthday present – announced by prime minister Theresa May in June. There is also just enough to allocate a little extra money to other public services, which the OBR estimates is enough to mean those other services will avoid further real-terms cuts on average over the next five years. But it is not enough to ensure that real-terms spending in these other areas will keep pace with population growth.

The rest of the Budget announcements are a package of tax increases – including on digital services and people working off-payroll in the private sector – which will help pay for tax cuts and spending increases elsewhere. These include increases in the income tax personal allowance and higher rate threshold, and a reversal of some of the cuts that George Osborne made to work allowances in universal credit – though other significant cuts to working-age benefits remain.

But the Budget does nothing to address the longer term question of how the government plans to bring tax revenues into line with public expectations for public services, pensions and welfare.

The problem facing this and future UK governments is well-known. As the population ages and the costs of delivering services rise, the government will need to spend more – particularly on pensions, health and social care – to meet public expectations.

But economic trends, from the increasing fuel efficiency of vehicles to the rise of self-employment, are undermining the tax system’s ability to raise revenue.

The OBR projects that the government will need to increase annual spending on health, social care and pensions by 1.7% of national income (or £36bn in today’s terms) over the next 10 years to maintain the current scope and quality, and to meet rising costs of service delivery. But over the same period, tax revenues are expected to fall by 0.2% of national income (or £5bn in today’s terms).

The same trends are expected to continue thereafter. This implies that health, pensions, social care and debt interest costs could eventually swallow the entirety of tax revenues, leaving nothing for working-age welfare or other public services.

Simply borrowing to fill the gap would not be sustainable, even if a future chancellor was willing to allow borrowing to rise that much – and Philip Hammond aspires to do the reverse, hoping to eliminate borrowing by the mid-2020s.

Working out how to put tax revenues and spending demands on a sustainable future path is one of the greatest political challenges facing governments of advanced economies. At some point the government needs to be honest with the public about the choices they face. The Budget did not do this. If anything, it moved a step further away from this conversation.

Philip Hammond told Parliament that his "idea of ending austerity does not involve increasing people’s tax bills". But if he does not want to increase people’s tax bills and he remains committed to eliminating public borrowing, it raises the question: which areas of public service provision or welfare does he plan to scale back?

Labour has made clear that it is willing to raise taxes and borrow more, but question marks also remain over how it would deal with the longer term pressures on public spending. The Labour manifesto laid out plans for a significant increase in tax revenues but most of this was allocated to new spending commitments – including abolishing university tuition fees and new public support childcare – not to meeting the costs of the public’s existing expectations for public services.

So far both the UK’s main political parties have ducked this big issue but eventually the public will have to make a choice between lowering their expectations for what the state provides and stumping up more in taxes.

This blog was first published on the Institute for Government’s site

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