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
|
| 2012-13
| 2013-14
| 2014-15
| 2015-16
| 2016-17
|
| 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 |
| TOTAL FISCAL IMPACT OF POLICY DECISIONS
| -1,930 | -950
| +1,985 | +90
| +1,140 |
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
|
