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

1. Tough choices ahead
Illustrating 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 years
This is due to the:
• State of the public finances
• Struggling economy
• Coalition’s fiscal targets
Tough choices will face whoever wins the 2015 election and imply
one 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 2014/15
1. Move the structural budget into surplus at the end of a rolling, five-
year period – currently set for 2016/17
2. 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 2016/17
Structural deficit -4.6 -4.2 -2.7 -1.5 -0.7 0.5
Public 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 Spending
3% 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 an
extra £20 billion in 2016/17 compared to the Coalition’s
current plans
This 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