1. Fiscal position and outlook for the future
Gemma Tetlow
Presentation at CIPFA Public Service Finance Leaders’ Retreat
14 April 2016, Ashridge House, Hertfordshire
© Institute for Fiscal Studies

2. Introduction
Latest official forecasts showed significant weakening of economic and fiscal outlook
Precipitated by very weak GDP performance in 2015 Q4
UK’s supply potential expected to be lower than previously thought
In the absence of policy change, borrowing would have increased by £17 billion in 2020–21
Government responded by...
Small net tax increase/spending cut
Shuffling spending/revenues between years
Pencilling in one extra year of spending squeeze: 2020–21
© Institute for Fiscal Studies

3. Achieve overall budget surplus from 2019–20
2015–16: £72.2 billion
2019–20:
Intended to achieve surplus of £10.4 billion
Reversal of cuts to PIP: reduces this to £9.1 billion
Source: Office for Budget Responsibility. Figures for 2016–17 to 2020–21 are adjusted to account for subsequent reversal of planned cuts to Personal Independence Payments (PIP).
© Institute for Fiscal Studies

4. Increase in revenues and (bigger) reduction in spending
Significant increase in revenues in 2019–20 achieved by delaying receipt of some corporation tax...
...significant reduction in spending in same year because capital spending brought forward
Source: Office for Budget Responsibility. Figures for 2016–17 to 2020–21 are adjusted to account for subsequent reversal of planned cuts to Personal Independence Payments (PIP).
© Institute for Fiscal Studies

5. Departmental resource spending
Source: HM Treasury and Office for Budget Responsibility. ‘Protected’ areas of spending are NHS and schools in England, defence and international development.
© Institute for Fiscal Studies

6. Outlook for local government
Grants from central government to be cut significantly
But council tax and business rates revenues to grow
Additional (up to 2%) increase in council tax to pay for social care
Overall local authority spending power, 2015–16 to 2019–20
Projected to fall by 7.3% in real terms
Based on figures from Feb 2016: before Chancellor announced additional £3.5 billion of ‘efficiency savings’ for 2019–20
Cuts would be somewhat larger if LG bears some of these ‘efficiency savings’
Compared to last five years
Much slower pace of cuts (average c.25% cut, 2009–10 to 2015–16)
Cuts no longer heavily concentrated on the most grant-reliant (i.e. poorer) areas
© Institute for Fiscal Studies

7. Average change in spending power of councils between 2009−10 and 2015−16
© Institute for Fiscal Studies
Source: Innes and Phillips (2015).

8. Average change in spending power of councils between 2009−10 and 2015−16
© Institute for Fiscal Studies
Source: Innes and Phillips (2015).

9. Average change in spending power of councils between 2015−16 and 2019−20
© Institute for Fiscal Studies
Source: Innes and Phillips (2015).

10. Average change in spending power of councils between 2015−16 and 2019−20
© Institute for Fiscal Studies
Source: Innes and Phillips (2015).

11. But cuts will vary significantly across areas
Real terms change in core spending power: single-tier and county councils
Source: Department for Communities and Local Government (2016), ‘Final local government finance settlement: 2016 to 2017’.
© Institute for Fiscal Studies

12. Additional pressures on local government
Population growth
Expected to grow by 3.6% across England, 2015 to 2020
Some areas expected to grow much more quickly: fastest growing 8 local authorities all in London (7.6% to 10.8% growth)
Increase in employers’ National Insurance contributions this year
Costing public sector as a whole £3.3 billion
National Living Wage
Rising to £9 per hour by 2020
Particular pressure on costs of social care?
Resolution Foundation estimate this will increase payroll costs associated with frontline care workers by £2.3 billion
© Institute for Fiscal Studies

13. Important decisions still to made
Full devolution of business rates to local authorities by 2020
Accompanied by additional spending responsibilities
Important decisions still to be made
How to balance risks and incentives in business rates retention?
What additional spending will be devolved?
Policies chosen will affect incentives and risks that local authorities face
© Institute for Fiscal Studies

14. Risks remain to the public finances
Economic developments
Both upside and downside risks
Future policy changes, e.g.
Manifesto commitment to cut income tax further
Will planned increases in fuel duty rates actually happen?
Government may need to look for additional ways to cut borrowing?
Previous experience suggests quite heavy reliance on cuts to public service spending
Increasingly large fractions of public spending are now explicitly or implicitly ‘protected’: NHS, schools, defence, international development, pensioner benefits, (working age benefits?)
© Institute for Fiscal Studies

15. Large parts of public spending are now explicitly or implicitly protected
Total public spending, 2015–16 = £753.9 billion
Source: HM Treasury and Office for Budget Responsibility. LASFE = locally financed current expenditure.
© Institute for Fiscal Studies

16. Risks remain to the public finances
Economic developments
Both upside and downside risks
Future policy changes, e.g.
Manifesto commitment to cut income tax further
Will planned increases in fuel duty rates actually happen?
Government may need to look for additional ways to cut borrowing?
Previous experience suggests quite heavy reliance on cuts to public service spending
Increasingly large fractions of public spending are now explicitly or implicitly ‘protected’: NHS, schools, defence, international development, pensioner benefits, (working age benefits?)
Government has also pledged not to increase largest taxes
© Institute for Fiscal Studies

17. Government has commitments not to increase largest taxes
Total revenues, 2015–16 = £681.8 billion
© Institute for Fiscal Studies

18. Summary
Budget 2016 set out plan to achieve surplus of £10bn in 2019–20
Predicated on further cuts to spending on public services
Local authority spending power to be cut by 7.3% between 2015–16 and 2019–20
Slower pace of cuts than seen over last five years
No longer so concentrated on most grant-reliant (i.e. poorer) authorities
But there is still significant variation across areas
Still to come
Important decisions to be made about how further responsibility for revenues and spending will be devolved
Where will £3.5 billion of ‘efficiency savings’ be found in 2019–20?
Further spending squeeze in 2020–21?
Risks remain to the public finances: upside and downside risks, but increasingly wide-ranging ‘protections’ mean unprotected areas could be hit hard if further savings needed?
© Institute for Fiscal Studies