Tough choices ahead: Illustrating the choices and trade-offs in the next spending review

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All of Britain's major political parties face tough choices on tax and public spending over the next few years. Whoever is in government after the 2015 general election will have to face up to these …

All of Britain's major political parties face tough choices on tax and public spending over the next few years. Whoever is in government after the 2015 general election will have to face up to these difficult decisions and introduce more spending cuts, cuts in welfare, tax increases or higher deficits for longer – or a combination of all of these. This presentation shows the extent of the tough choices ahead.

For more, visit IPPR at http://bit.ly/tough-choices

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  • 1. Tough choices aheadIllustrating the choices and trade-offs in the next spending review
  • 2. All major political parties face tough choices on tax and spend over the next few yearsThis is due to the: • State of the public finances • Struggling economy • Coalition’s fiscal targetsTough choices will face whoever wins the 2015 election and implyone or more: • Departmental spending cuts • Welfare cuts • Tax rises • Higher deficits for longer
  • 3. Coalition plans for the public finances in the two years after the current spending review ends in 2014/151. Move the structural budget into surplus at the end of a rolling, five- year period – currently set for 2016/172. Have public sector debt falling as a share of GDP after 2015/16 – although there is now speculation that this target will be missed% of GDP 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17Structural deficit -4.6 -4.2 -2.7 -1.5 -0.7 0.5Public sector net debt 67.3 71.9 75.0 76.3 76.0 74.3
  • 4. Public spending will be lower in 2016/17 than 2014/15 50 Public spending as % of GDP 45 40 35 30 25 20 15 10 5 0 2010-11 2012-13 2014-15 2016-17 Departmental spending Benefits and pensions Gross investment Debt interest Other
  • 5. Implications for departmental spending• An annual real-terms cut in total departmental spending of 3.8% - UP from 2.3% a year in the current spending review• BUT if the NHS and international development (DFID) are protected, as now, other departments take an even bigger hit Spending cuts in 2016/17 compared to 2014/15, in today’s prices No departmental protections NHS & DFID protected NHS £7.8bn - Education £3.8bn £6.0bn Defence £1.7bn £2.7bn Home Office £0.5bn £0.9bn
  • 6. What could these cuts mean in practice?If the NHS and DFID budgets are protected:• Education: The equivalent of around 130,000 fewer teachers• Defence: The equivalent of around 55,000 fewer service personnel – or three warships decommissioned• Home Office: The equivalent of around 18,000 fewer police officers
  • 7. Cuts in welfare spending would reduce the hit on departments• The chancellor has said that reducing welfare spending by £10 billion in 2016/17 would enable departmental cuts to be in line with those in the 2010 spending review Spending cuts in 2016/17 compared to 2014/15, in today’s prices (assuming the NHS and DFID are protected) No welfare cuts £10bn welfare cuts Education £6.0bn £3.7bn Defence £2.7bn £1.7bn Home Office £0.9bn £0.5bn
  • 8. Welfare spending in 2012/13 £4bn State pensions £13bn Pension credit & winter£13bn fuel allowance Tax credits £80bn Disability & sickness £29bn benefits Housing benefit & council tax benefit Income-related £31bn benefits £11bn Child Benefit £31bn Other benefits
  • 9. How could £10 billion be cut from the welfare bill?• Ending the winter fuel allowance = £2 billion a year• Freezing child benefit for two years = £500 million in 2016/17• Freezing all working-age benefits for two years = approximately £4 billion in 2016/17
  • 10. Under current plans, spending cuts account for 97% of total fiscal consolidation in 2014/15 and 2016/17 If this was reduced to 70% then tax would have to rise by £20 billion Current plans 70:30 split A mansion tax could Spending3% tax cuts are rises raise £2bn – 10% of the extra revenues £20bn lower that would be needed 97% spending cuts Equivalent to an extra 4p on the basic rate of income tax or VAT at 24%
  • 11. Is there another way?Delaying fiscal consolidation by two years would generate anextra £20 billion in 2016/17 compared to the Coalition’scurrent plansThis could be used to: – Reduce cuts to departmental spending without cutting welfare spending – Cut taxes – Invest in infrastructure
  • 12. But cuts would have to be continued beyond 2016/17• Real terms cuts in departmental spending would continue for two more years than under current plans• Borrowing would be higher in 2016/17 than currently planed – at 2.0% of GDP instead of 1.1%• Debt would be slightly higher in 2016/17 – at 75.2% of GDP rather than 74.3%• Both of the Coalition’s fiscal targets would be missed
  • 13. To sum up• The Coalition’s current plans to 2016/17 imply large cuts in departmental spending – larger still if the NHS is protected, as now• Cutting welfare would reduce the impact on departments, but is difficult to achieve without dramatically reducing entitlements• Increasing taxes would reduce the need for spending cuts, but options like a mansion tax raise little in relative terms• Delaying fiscal consolidation by two years would reduce the scale of spending cuts in the short term, but borrowing and debt would increase
  • 14. Tough choices• In this exercise IPPR is not advocating one course of action over another• But the figures show no party will be able to avoid tough choices on tax and spend in the years ahead• These challenges should be central to the public debate in the run-up to the next general election
  • 15. Notes• All figures are taken from or are IPPR calculations derived from the Office for Budget Responsibility’s March 2012 Economic and Fiscal Outlook• A more detailed technical version of this slide pack is available on IPPR’s website at http://bit.ly/tough-choices