3rd December 2014
Economists have questioned why the Chancellor of Exchequer George Osborne plans to take spending as a proportion of GDP back to levels last seen in 1938. The level would take total managed spending to 35.2% of GDP by 2019/2020 meaning that the bulk of deficit reduction will be done through cuts. Fund manager Schroders economist Azad Zangana says that a future government might have to look at tax rises if such cuts are seen as a step too far.
SMF chief economist, Nida Broughton says: “What exactly is the Chancellor trying to achieve here? Their plans appear to go far beyond even what fiscal conservatives would view as strictly necessary. The Government has given the public no rationale for these extra cuts. As a proportion of GDP, Government spending is being taken back to the level last since in 1938. If there was room for doubt before, there appears to be little now. A dramatically smaller state, not fiscal credibility, is the real goal here.”
Borrowing heading in the wrong direction
Schroders European economist Azad Zangana says: “In terms of the public finances, public sector net borrowing on a like-for-like basis is estimated to be £8.7 billion higher over the forecast horizon. There have been several definition changes including a move to new accounting standards, but the OBR has helpfully provided the like-for-like comparison which shows that the borrowing is heading in the wrong direction ahead of the general election. Indeed, based on the latest proposed changes, just over £1 billion will be given away in tax cuts and spending increases in the next financial year. This is offset by the banking fines imposed earlier this year, which will be spent on GP services over the following four years. Note, according to the OBR, the extra £295 million of NHS spending will end in 2019/20, and is not permanent as the Chancellor claimed over the weekend.”
He adds: “Overall, the Chancellor managed to make more changes than expected given the lack of fiscal wiggle room. However, he is not able to hide the deterioration in the public finances, and is heavily relying on spending cuts after the election in order to put things back on track. The OBR assumes total managed government expenditure to fall from 40.5% at the end of this year to an eye-watering 35.2% by 2019-20 – the lowest figure since 1948! We think this may be a step too far, and there is a high chance that the next government will have to pass on some of the burden to tax payers. Either that or the next government must be willing to look at making cuts to the biggest burden on the state: the NHS and state pension system.”