SMF response to Autumn Statement: £31bn cut to public services by 2018, growth impact minimal

5 December 2012

New analysis of the Autumn Statement by the Social Market Foundation reveals that public services look set to bear the brunt of £31bn of cuts after the next election. The SMF also concluded that the Autumn Statement did little to boost growth, but the story could have been much worse had the Office for Budget Responsibility (OBR) not ditched its models for assessing the public finances.

Implications for public services: big cuts to come

In a repeat performance of last year’s Autumn Statement, the Chancellor has pencilled in more cuts to come after 2014-15 to ensure that he remains on track with deficit reduction.  The cuts announced today involve extending the annual cut in current spending in the first two years of the next parliament for an extra year, to 2017-18.

According to analysis by the Social Market Foundation, this means significant cuts to public services, amounting to just over £31 billion by between 2014 and 2018 or a real-terms cut of 19% if health, education and international development are protected.

SMF Director Ian Mulheirn said:

“While the Chancellor’s explicit cuts to welfare spending of £5 billion have attracted the most attention, the small print of the Treasury’s document highlights real pain to come for public services at the next spending review.

“The Chancellor has set out a total spending envelope that has current spending – on benefits and public services - falling between 2014-15 and 2017-18. Combined with the extra tightening that the Chancellor committed to at last year’s Autumn Statement, and the natural growth in benefits spending, departmental spending faces a cut of just over £31 billion between 2014 and 2018.

“The implications for public services are dire –departments like the Home Office and Ministry of Justice will be over 40% smaller in 2018 than they were in 2010, if protection for key departments continues. There are many stories that come out of today’s Autumn Statement, but the one that people will ultimately feel most keenly – further big cuts to public services - is buried deep in the numbers.”

Growth

On growth, the pre-Autumn Statement rhetoric implied that the Government would make growth-friendly cuts to fund growth-boosting infrastructure. In the event, the switch from current spending to capital spending only amounted to £5bn in the next two years, funded by a squeeze on benefits and departmental spending cuts. Taking all of the measures together, the OBR estimates the measures will boost output by just 0.1% in aggregate.

Instead of boosting output, most of the Autumn Statement focused on supply-side measures that make it more attractive to work, or cut costs for businesses and households. The SMF concluded that these will do little to drag the economy out of the mire in the short-term.

Ian Mulheirn said:

“Despite prior indications, this was not an Autumn Statement for growth. The microscopic infrastructure growth measure will be all but cancelled out by the cuts used to pay for it. Cutting working age benefits at a time of weak demand will do no favours for growth.

“By contrast, raising £600m from limiting pensions tax relief for top earners is an excellent example of a demand-friendly cut. The trouble is, it’s small beer. They should have done more.”

The Office for Budget Responsibility’s verdict: shifting the goalposts?

The Office for Budget Responsibility’s verdict on how much spare capacity there is in the economy was much more optimistic than expected.

Until today, the OBR has delivered every estimate of the UK output gap using specific models based on business survey data. Based on these models, the Social Market Foundation had calculated that the size of the structural deficit would be even bigger than previously expected this year. But today the OBR junked its models wholesale, ruling that there is a large and persistent lack of demand in the economy, not that there is a problem on the supply-side. 

Ian Mulheirn said:

“It is good news for the public finances that the OBR has abandoned its pessimistic models for calculating the output gap, as the cuts that would have followed an assessment based on its own models would have been even more eye-watering.

But this volte-face by the OBR raise important questions about the new institution. If our forecasting experts are resorting to striking a finger in the air, shouldn’t they be more explicitly accountable for the resulting policy decisions?

"It is also rather difficult for the Chancellor to explain. The OBR is now pointing to a huge and persistent shortfall in demand. Meanwhile, the Chancellor has set out billions in measures to try to boost the supply-side of the economy. The Treasury and the OBR are diagnosing very different problems with the UK economy."

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