The fiscal state of the nationPaul JohnsonChartered Institute of Housing Conference

June 12 2012

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Since 2008...

• Following a long period of growth, GDP has fallen dramatically and failed to recover

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GDP has nowhere near recovered pre-crisis levels

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-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

90

95

100

105

110

115

2007Q1–2014Q1

Quarters from peak

Peak

= 1

00

A completely different story than previous recessions

© Institute for Fiscal Studies

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

90

95

100

105

110

115

2007Q1–2014Q1

1989Q2–1996Q2

1978Q4–1985Q4

Quarters from peak

Peak

= 1

00

Since 2008...

• GDP has fallen dramatically and failed to recover• Trend output is now expected to be 13% smaller in 2016

than had been forecast in Budget 2008– The economy will be about £200 billion smaller than expected

• This is expected to be a permanent loss– Depends on uncertain estimates of the “output gap”

• And, along with effects of tax and benefit changes will lead to a big fall in household incomes

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Household incomes falling to unprecedented degree

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2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-1690

91

92

93

94

95

96

97

98

99

100M

ed

ian

net

hou

seh

old

in

com

e

(in

dexed

to 2

00

9=

10

0)

Sources: Department for Work and Pensions’ HBAI series; IFS calculations and projections using Family Resources Survey.

Since 2008...

• GDP has fallen dramatically and failed to recover• Trend output is now expected to be 13% smaller in 2016

than had been forecast in Budget 2008– The economy will be about £200 billion smaller than expected

• This is expected to be a permanent loss– Depends on uncertain estimates of the “output gap”

• And, along with effects of tax and benefit changes will lead to a big fall in household incomes

• And a big public finance problem

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This has created a hole in the public finances

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199

199

199

199

200

200

200

200

200

200

200

200

200

200

201

201

201

201

201

201

201

30.0

35.0

40.0

45.0

50.0

55.0 Total spending (Budget 2008) Receipts (Budget 2008)Total spending (no action) Receipts (no action)

Perc

enta

ge o

f nati

onal in

com

e

Permanent

damage =

7.5% of GDP

(£114bn)

Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.

Which has to be dealt with

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1974

–75

1978

–79

1982

–83

1986

–87

1990

–91

1994

–95

1998

–99

2002

–03

2006

–07

2010

–11

2014

–15

2018

–19

2022

–23

2026

–27

2030

–31

2034

–35

2038

–39

2042

–43

2046

–47

2050

–51

020406080

100120140160180200

Debt: Budget 2008Debt: No policy action

Perc

enta

ge o

f nati

onal

inco

me

Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.

2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–170

1

2

3

4

5

6

7

8

9Series6Other current spendDebt interestBenefitsInvestment

Perc

enta

ge o

f nati

onal

inco

me

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The government plans to do that over 7 years(original plan to do so over 5 years)

20%

80%

Notes and sources: see Figure 3.5 of The IFS Green Budget: February 2012.

Nov 2011: 7.5% national income (£114bn) hole in public finances

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Which just leads to fiscal mandate being met..

199

199

199

199

200

200

200

200

200

200

200

200

200

200

201

201

201

201

201

201

201

30.0

35.0

40.0

45.0

50.0

55.0 Total spending (Budget 2008) Receipts (Budget 2008)Receipts (no action) Total spending (no action)Total spending (November 2011) Receipts (November 2011)

Perc

enta

ge o

f nati

onal in

com

e

Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.

Debt back on a more sustainable path- but to remain above pre-crisis levels for a generation

© Institute for Fiscal Studies

1974

–75

1978

–79

1982

–83

1986

–87

1990

–91

1994

–95

1998

–99

2002

–03

2006

–07

2010

–11

2014

–15

2018

–19

2022

–23

2026

–27

2030

–31

2034

–35

2038

–39

020406080

100120140160180200

Debt: Budget 2008Debt: No policy actionDebt: Current policy

Perc

enta

ge o

f nati

onal

inco

me

Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.

Risks to the public finances

• Macroeconomic forecasts might not prove accurate– Even if they did, revenues/spending might not turn out as forecast

• Government may yet be unable or unwilling to implement the planned spending cuts– Only 12% of the planned cut to public service spending (6% of the planned

cut to current public service spending) implemented by the end of 2011–12

• Nothing close to this scale of cuts has been attempted in the last 60 years

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6-year squeeze on public service spending

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1950–51

1955–56

1960–61

1965–66

1970–71

1975–76

1980–81

1985–86

1990–91

1995–96

2000–01

2005–06

2010–11

2015–16-10

-5

0

5

10

15

Labour ConLib Historic 7 year moving average

Annual p

erc

enta

ge r

eal i

ncr

ease

Note: Figure shows total public spending less spending on welfare benefits and debt interest.

9.3% cut over 7 years

16.2% cut over 7 years

7-year

Public service spending returns to 2004 levels

© Institute for Fiscal Studies

1998

–99

1999

–00

2000

–01

2001

–02

2002

–03

2003

–04

2004

–05

2005

–06

2006

–07

2007

–08

2008

–09

2009

–10

2010

–11

2011

–12

2012

–13

2013

–14

2014

–15

2015

–16

2016

–17

50

70

90

110

130

150

170

190

210

230

Public service spending

Real sp

endin

g (

1998-9

9 =

100)

Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.

With big variations in DEL changes 2010-11 to 2014-15 by department

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International Development

Energy and Climate Change

NHS (England)

Defence

Education

Total

Transport

CLG: Local Government

Home Office

Justice

Environment, Food and Rural Affairs

Business, Innovation and Skills

Culture, Media and Sport

CLG: Communities

-100% -80% -60% -40% -20% 0% 20% 40%

37.8%

6.5%

1.0%

-8.2%

-11.9%

-11.5%

-14.5%

-20.7%

-22.0%

-27.2%

-27.6%

-31.2%

-46.1%

-71.3%

Percentage real increase, 2010–11 to 2014–15

But remarkably similar priorities over time

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1998

–99

1999

–00

2000

–01

2001

–02

2002

–03

2003

–04

2004

–05

2005

–06

2006

–07

2007

–08

2008

–09

2009

–10

2010

–11

2011

–12

2012

–13

2013

–14

2014

–15

2015

–16

2016

–17

50

70

90

110

130

150

170

190

210

230

Health

Public service spending

Education

Defence

Real sp

endin

g (

1998-9

9 =

100)

Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.

What comes next for public services

• Chancellor has pencilled in cuts in 2015-16 and 2016-17• How much comes from public services depends on choice between

welfare spending and public service spending• In the Budget the chancellor suggested a welfare cut of £8 billion (in

current terms) would leave same balance between welfare and public services as over this SR period

• Which would imply RDEL cuts of 2.3% a year – Would need to be 3.8% a year without welfare cuts

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Trade-off between cuts to public service spending and welfare cuts: 2015–16 and 2016–17

-25 -20 -15 -10 -5 0 5-5

-4

-3

-2

-1

0

1

Change in welfare spending (£bn, 2011–12 terms)(or change in taxation or borrowing)

Avera

ge a

nnual re

al

change in R

DEL

(%)

© Institute for Fiscal Studies

Note: HM Treasury and IFS calculations. Resource Departmental Expenditure Limits (RDEL) is the non-investment component of the spending by central

government on the delivery and administration of public services.

RDEL cut by 2.3% a year, £8bn welfare cut

RDEL cut by 3.8% a year, no welfare cut

No RDEL cut, £20bn welfare

cut

What comes next for public services

• Chancellor has pencilled in cuts in 2015-16 and 2016-17• How much comes from public services depends on choice between

welfare spending and public service spending• In the Budget the chancellor suggested a welfare cut of £8 billion (in

current terms) would leave same balance between welfare and public services as over this SR period

• Which would imply RDEL cuts of 2.3% a year – Would need to be 3.8% a year without welfare cuts

• With no welfare cuts and health still protected (no real cuts) rest of public service spending would need to fall even faster

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Summary

• The loss of output following the crisis has been deep and prolonged• With a consequent reduction in household incomes and dramatic

worsening of the public finances• Government’s fiscal consolidation is most dramatic in 60 years

– But still leaves debt above pre-crisis levels for a generation or more

• Though a remarkable consistency of priorities across time• Cuts pencilled in for 2015-16 and 2016-17 look painful• The new fiscal framework, especially the independent OBR, looks more

robust than what went before• But there remain risks to deliverability

– And the short term problems shouldn’t lead to us ignoring long term pressures

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