Budget 2012 - Treasury Contents

3  The Public Finances

Changes within the Budget

66. The overall fiscal impact of the policy decisions announced in the Budget was small. In the Red Book the Government stated:

    Budget 2012 policy decisions have a neutral impact on the public finances over the forecast period, with the costs of policy decisions offset by measures to reduce borrowing. As a result, all of the decrease in the OBR's forecast for public sector net borrowing will contribute towards deficit reduction.[115]

Taking into account the forestalling impact of the reduction in the additional rate of income tax and the cap on unlimited tax reliefs, the Government has estimated the impact of the policy measures in the Budget to be a £1.9 billion increase in spending compared to receipts in 2012-13. However, as the estimated impact of forestalling is then reversed, the Government forecasts an increase in receipts compared to spending from 2014-15 onwards.Table 3: Summary of Budget policy decisions[116]
£ million
Total tax policy decisions +560-1,550 -520-500 -30
Total spending policy decisions -90-160 +755+960 +1,170
TOTAL POLICY DECISIONS +470-1,710 +235+460 +1,140
Forestalling impact of additional rate reduction and cap on unlimited tax reliefs -2,400+760 +1,750-370 0

Costings represent the OBR's latest economic and fiscal determinants

67. Although the net revenue effect of the individual policy decisions in the Budget was limited, there were 56 new Budget policy decisions. The only two whose effect is more than £1 billion in 2016-17, the end of the five year period, are as follows:

  • The increase in the personal allowance by £1,100 in 2013-14, with a proportion passed to higher rate tax payers (which costs £3.58 billion in 2016-17); and
  • The freeze and restriction to existing recipients of the age-related allowance, from 6 April 2013 (which raises £1.25 billion in 2016-17).[117]

These changes are discussed later in this Report (see pages 42 to 46).

Fiscal consolidation

68. By the end of 2011-12, approximately two-thirds of the fiscal consolidation to be achieved through tax will be in place, but only about 30 per cent of the reductions in spending planned for the Spending Review 2010 period.[118] Mr Carl Emmerson, Deputy Director of the IFS, made the point that the planned spending cuts represented "the longest sustained cuts to public service spending since the second world war—if they are delivered. [...] It is almost twice as big as the seven-year period of cuts delivered between 1975 and 1982 after economy-wide inflation".[119]

69. When asked whether the forecast spending totals would be met, Mr Paul Johnson, Director of the IFS, responded:

    They are going to be extremely tough to hit and it will take a significant amount of political capital to hit them. What was interesting about what we saw this year is that there have been some underspends in departmental budgets, despite the scale of the cuts intended through this year. In one sense, that is perhaps not that surprising given the political capital that would be lost if there were overspends. [...] In some sense, we have seen the slightly easier wins happening, but I certainly do not think that the public have got their head round the fact that the large majority of the cuts are still to come. The numbers that you quote—the 30 per cent already done—are off a baseline of assuming that real freezes is a reasonable baseline. It will feel tighter than that, because the normal baseline is to move up in line with the economy.[120]

Additionally, in the IFS post-Budget briefing, Mr Johnson noted that the Chancellor is:

    [...] only meeting his borrowing forecast this year because a £5 billion undershoot in tax receipts is, despite the scale of the planned cuts, slightly more than offset by a £6 billion underspend—£5 billion of that by government departments.[121]

On the Government's underspend the OBR explained:

We expect £6.2 billion less expenditure than we forecast in November,

thanks largely to central government departments under-spending against

plans by more than expected[122].

70. The Government has made progress in its fiscal consolidation. However, it has only met its forecast for this year owing to a £6 billion underspend, and the main challenges of the public sector spending consolidation still lie ahead.

71. The Treasury will be responsible for achieving the Government's fiscal policy and the required spending consolidation. We note the findings of the recent review of the Treasury's response to the financial crisis regarding the organisational challenges it faces.[123] We will monitor how the Treasury addresses the concerns raised about staff turnover, pay and cultural barriers within the organisation.

Additional reductions in spending on welfare

72. As part of the Budget the Government published an analysis showing that if the reductions in departmental expenditure carry on at the same rate in the next spending review period there will need to be an extra £10 billion reduction in welfare expenditure by 2016-17.[124] Mr Emmerson told us that:

    The most significant number in the Budget was the £10 billion welfare cut. It is not a new policy, but it is the Chancellor now starting to point out the trade-offs between public service spending and welfare spending in the next Parliament if he is to get his public spending plans kept to.[125]

He also explained that:

    To give some figures on that, the £10 billion is in 2016-17 prices, so in today's terms, it will feel more like £8 billion. If you do not want to cut departmental spending or central Government spending on public services in the next Parliament, it is not £8 billion that you need; you would need £20 billion from welfare. If you do not want to cut welfare, then instead of cutting departmental spending at 2.3 per cent a year—the current rate of cut after economy-wide inflation—you would have to cut it by 3.8 per cent a year on average. To keep to Mr Osborne's total spending limits, those are the kind of constraints that we will be operating within the first two years of the next Parliament.[126]

73. The Chancellor made clear that these savings would come from annually managed expenditure in the next spending review period and that the Government has just started working on this. He stated:

    I hope to provide an update on this at the autumn statement. This is the work for the next spending review. We need to start the big thinking on future welfare reform, having undertaken very significant welfare reform with the Welfare Reform Act that has just become law, and the introduction of universal credit. I am saying that the job is not done. It is right that Parliament and the public, and not just Whitehall, focus on this issue.[127]

74. In the next spending review period the Government will need, on current forecasts, to find significant further reductions in expenditure. We look forward to the Chancellor's update in the Autumn Statement.

Performance against the Government's fiscal targets

75. The OBR's Economic and fiscal outlook sets out the Government's medium term fiscal mandate and supplementary target as:

  • To balance the cyclically-adjusted current budget by the end of a rolling, five-year period, which is now 2016-17, and
  • To see public sector net debt falling as a share of GDP in 2015-16.[128]

76. The Office for Budget Responsibility is currently forecasting that the Government will meet both of these targets:

    Our latest forecasts suggest that the Government has a greater than 50 per cent chance of hitting both targets. The margin for error against the fiscal mandate would have been very slightly smaller than in November in the absence of any Budget measures, but is unchanged when they are included. The margin for error against the supplementary target is unchanged, both including and excluding the impact of Budget measures.[129]

77. We asked whether the Chancellor could claim he has met his target if we experience a sluggish and long-term recovery. Mr Parker, from the OBR, responded that "He could say that he has met the fiscal mandate. Whether he meets the secondary target of debt falling is another matter."[130]

78. The OBR suggests that the Government is on course to meet its fiscal mandate and supplementary target. There is little margin for error. The achievement of the fiscal mandate is dependent on measurement of the output gap. We have already expressed our concerns about the output gap as a measure (See para 65).

115   HM Treasury, Budget 2012, 21 March 2012, p 17 Back

116   HM Treasury, Budget 2012, 21 March 2012, Table 1, p 7 and Table 2.1, p 50-51  Back

117   HM Treasury, Budget 2012, 21 March 2012, Table 2.1, p 50 Back

118   HM Treasury, Budget 2012, 21 March 2012, p 19 Back

119   Q 166 Back

120   Q 163 Back

121   Institute for Fiscal Studies, Post-budget briefing 2012, March 2012 Back

122   Office for Budget Responsibility, Economic and fiscal outlook, March 2012, p 151 Back

123   HM Treasury, Review of HM Treasury's management response to the financial crisis, March 2012 Back

124   HM Treasury, Budget 2012, 21 March 2012, Annex A Back

125   Q 190 Back

126   Q 164 Back

127   Q 325 Back

128   Office for Budget Responsibility, Economic and fiscal outlook, March 2012, p 163  Back

129   Office for Budget Responsibility, Economic and fiscal outlook, March 2012, p 163 Back

130   Q 20 Back

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Prepared 18 April 2012