We are still deep in the winter of austerity. The latest Green Budget from the Institute for Fiscal Studies makes that icily clear. Philip Hammond may have dropped George Osborne’s economically reckless target of eradicating the deficit in its entirety by 2019-20, but he didn’t reverse any of the spending cuts baked in by his predecessor in the wake of the last election. The freeze on welfare payments will bite all the harder as inflation spikes due to the plunge in the pound since the Brexit vote.
Departmental spending budgets are also set to carry on falling. Taxes overall are on the up too, despite the Conservatives’ “tax lock” on income tax and VAT, mainly thanks to a plethora of stealth tax rises such as hikes in the levy on dividend payments and insurance contracts.
The IFS calculates that there will be around £60bn worth of austerity by 2019-20. Of this £12bn (20 per cent) will be raised from cuts to welfare. Some £16bn (25 per cent) will come from tax rises. But almost all the rest – by far the biggest chunk of austerity – will come from slashing spending by Whitehall departments.
By the end of the Parliament the budgets of departments such as justice, business, culture and the environment will be an astonishing 40 per cent lower than they were in 2010, when the programme of cuts began. And even then the pain will not be over. If the Budget, due to be delivered on 8 March, is to be finally brought into balance during the next Parliament the IFS estimates this will require another £34bn of austerity.
Needless to say, none of this is good news. The welfare cuts will pummel the incomes of some of the most financially vulnerable households in the country, and almost certainly push up inequality in the process.
Cuts on this scale to Whitehall departments are inevitably going to erode the quality of public services; some will probably be stretched beyond breaking point. Stealth tax increases will inevitably be passed on to households, squeezing disposable income.
What is going on? Why are on earth are we still knee-deep in austerity almost 10 years after the financial crisis hit? There are two main answers.
The first is that the UK population is ageing. This, naturally, means that the pensions bill is automatically increasing every year. But the situation is exacerbated by the fact that pensions – easily the biggest element of the welfare budget – have been protected in real terms by the Government since 2010.
The ageing population has also put great pressure on the National Health Service since older people tend to consume more health care. NHS spending, the biggest tranche of departmental spending, has also been protected in real terms since 2010 by ministers (although as the chaos in hospitals reminds us, spending is still falling badly short of rising demand). Protected pensions means welfare cuts have been pushed on to working age benefit recipients. And the protected NHS means most other government departments have had to shoulder the lion’s share of the cuts.
A bird’s-eye view of the public finances shows that taxes are rising as a share of GDP to their highest level since the late 1980s (37 per cent). Yet public spending is set to fall to only its lowest share of GDP since 2003-04 (38 per cent). The latter statistic has prompted some on the right to scoff at the whole concept of austerity.
“Was public spending really so inadequate in 2004?” they ask. But this is, intentionally or not, badly misleading. The reason for the discrepancy between the bird’s eye view and the pain on the ground is that we’re being forced to spend more on an older population, which is squeezing down the resources available for just about everything else.
The second main reason we are still in a world of austerity is that the size of the economy is so much smaller than we thought it would be seven years ago. Productivity growth – output per hour – has stalled since the financial crisis, which inevitably translates into weaker GDP growth and a lower tax take.
We still do not understand why productivity has stalled and it’s a phenomenon that can be seen across the Western world. But in Britain’s case, it’s pretty clear that George Osborne’s severe cuts to government infrastructure spending between 2010 and 2012 did unnecessary damage to growth. Now we have Brexit to contend with.
By diminishing Britain’s long-term potential productivity growth (an outcome the vast majority of economists expect) leaving the European Union will only make this problem worse. The national economic pie will be smaller and a larger share of it will be eaten by older Britons – the majority of whom, incidentally, voted for and delivered the Brexit vote. They may have “taken back control”, but the bill will largely be picked up by the young.