The fiscal state of the nation Paul Johnson Chartered Institute of Housing Conference June © Institute for Fiscal Studies

Since Following a long period of growth, GDP has fallen dramatically and failed to recover © Institute for Fiscal Studies

GDP has nowhere near recovered pre-crisis levels © Institute for Fiscal Studies

A completely different story than previous recessions © Institute for Fiscal Studies

Since GDP has fallen dramatically and failed to recover Trend output is now expected to be 13% smaller in 2016 than had been forecast in Budget 2008 –The economy will be about £200 billion smaller than expected This is expected to be a permanent loss –Depends on uncertain estimates of the “output gap” And, along with effects of tax and benefit changes will lead to a big fall in household incomes © Institute for Fiscal Studies

Household incomes falling to unprecedented degree © Institute for Fiscal Studies Sources: Department for Work and Pensions’ HBAI series; IFS calculations and projections using Family Resources Survey.

Since GDP has fallen dramatically and failed to recover Trend output is now expected to be 13% smaller in 2016 than had been forecast in Budget 2008 –The economy will be about £200 billion smaller than expected This is expected to be a permanent loss –Depends on uncertain estimates of the “output gap” And, along with effects of tax and benefit changes will lead to a big fall in household incomes And a big public finance problem © Institute for Fiscal Studies

This has created a hole in the public finances © Institute for Fiscal Studies Permanent damage = 7.5% of GDP (£114bn) Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.

Which has to be dealt with © Institute for Fiscal Studies Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.

© Institute for Fiscal Studies The government plans to do that over 7 years (original plan to do so over 5 years) 20% 80% Notes and sources: see Figure 3.5 of The IFS Green Budget: February Nov 2011: 7.5% national income (£114bn) hole in public finances

© Institute for Fiscal Studies Which just leads to fiscal mandate being met.. Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.

Debt back on a more sustainable path - but to remain above pre-crisis levels for a generation © Institute for Fiscal Studies Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.

Risks to the public finances Macroeconomic forecasts might not prove accurate –Even if they did, revenues/spending might not turn out as forecast Government may yet be unable or unwilling to implement the planned spending cuts –Only 12% of the planned cut to public service spending (6% of the planned cut to current public service spending) implemented by the end of 2011–12 Nothing close to this scale of cuts has been attempted in the last 60 years © Institute for Fiscal Studies

6-year squeeze on public service spending © Institute for Fiscal Studies Note: Figure shows total public spending less spending on welfare benefits and debt interest. 9.3% cut over 7 years 16.2% cut over 7 years 7-year

Public service spending returns to 2004 levels © Institute for Fiscal Studies Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.

With big variations in DEL changes to by department © Institute for Fiscal Studies

But remarkably similar priorities over time © Institute for Fiscal Studies Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.

What comes next for public services Chancellor has pencilled in cuts in and How much comes from public services depends on choice between welfare spending and public service spending In the Budget the chancellor suggested a welfare cut of £8 billion (in current terms) would leave same balance between welfare and public services as over this SR period Which would imply RDEL cuts of 2.3% a year –Would need to be 3.8% a year without welfare cuts © Institute for Fiscal Studies

Trade-off between cuts to public service spending and welfare cuts: 2015–16 and 2016–17 © Institute for Fiscal Studies Note: HM Treasury and IFS calculations. Resource Departmental Expenditure Limits (RDEL) is the non-investment component of the spending by central government on the delivery and administration of public services. RDEL cut by 2.3% a year, £8bn welfare cut RDEL cut by 3.8% a year, no welfare cut No RDEL cut, £20bn welfare cut

What comes next for public services Chancellor has pencilled in cuts in and How much comes from public services depends on choice between welfare spending and public service spending In the Budget the chancellor suggested a welfare cut of £8 billion (in current terms) would leave same balance between welfare and public services as over this SR period Which would imply RDEL cuts of 2.3% a year –Would need to be 3.8% a year without welfare cuts With no welfare cuts and health still protected (no real cuts) rest of public service spending would need to fall even faster © Institute for Fiscal Studies

Summary The loss of output following the crisis has been deep and prolonged With a consequent reduction in household incomes and dramatic worsening of the public finances Government’s fiscal consolidation is most dramatic in 60 years –But still leaves debt above pre-crisis levels for a generation or more Though a remarkable consistency of priorities across time Cuts pencilled in for and look painful The new fiscal framework, especially the independent OBR, looks more robust than what went before But there remain risks to deliverability –And the short term problems shouldn’t lead to us ignoring long term pressures © Institute for Fiscal Studies