Seven years after George Osborne ushered in a tough new age of spending cuts and deficit reduction, the Institute for Fiscal Studies had a grim message for the long-suffering British public yesterday: the age of austerity is not over.
The IFS is to the budget what the pundits are to Match of the Day. It pores over the highlights, dissects why things have gone wrong (and more rarely why they have gone right), and takes delight in telling it the way it is.
On this occasion, the IFS had plenty to analyse. There was some praise for Philip Hammond for raising public infrastructure spending and the thinktank was kinder than most about the chancellor’s decision to abolish stamp duty for most first-time buyers.
But other than that, it was all grim news. Although Britain is suffering from austerity fatigue, the IFS said the nation had not even reached half time in the struggle to put the public finances back in the black. Paul Johnson, the IFS’s director, said he found it hard to imagine the deficit being eradicated by the mid-2020s, which is what the government hopes to do.
Less than two years ago, Osborne was confidently predicting that he would be presiding over a £10bn budget surplus in the year running up to what was then expected to be a 2020 general election. A savage cut to Britain’s growth rate, coupled with some giveaways from Hammond, means that the UK is now forecast to run a deficit of £35bn in 2019-20.
The figures for borrowing would be £5-6bn a year higher had it not been for changes which take some spending off the government’s books. By 2022-23, borrowing will still be £25bn and that assumes a tightening of the purse strings which the IFS deems unlikely. Johnson said: “As the OBR notes, there is an Augustinian tinge to these plans: “Lord make me pure, but not yet”.”
All the extra borrowing to balance the books over the past decade has meant the national debt has more than doubled to 86% of national income. The debt ratio was even higher after the second world war but rapid growth meant it came down quickly. This time, the process is going to be much slower. Assuming that the OBR is right in its assessment that the trend rate of productivity growth is around 1%, it will take until the 2060s to get national debt back below 40% of GDP.
The post-war period was a time of rising real incomes and higher public spending. By contrast, over the next five years, the IFS says that spending on public services excluding the NHS will fall by 7%, while the £300m allocated to universal credit will only make a dent in the planned £12bn to be axed from working age benefits.
The IFS also questioned whether, even after Hammond’s cash injection, the settlement for health was all that generous, noting that once the ageing of the baby boomer generation is taken into account, there will be no increase in spending per head between now and the early 2020s. Johnson said the government would be forced to soften its approach to public spending.
“The last few years have been marked by constant (small) upgrades to implausibly tight spending plans to avoid problems in prisons, social care and now health,” he said. “There will almost inevitably be more such top-ups in the years ahead.”
But despite the bad news on the deficit, the national debt and public spending, the thinktank saved its real gloom for its forecasts for earnings.
When adjusted for inflation, the IFS noted that average (median) earnings fell by more than £2,000 a year to just over £22,000 in the five years after the start of the financial crisis. A recovery then began and, had earnings continued to grow at the rate seen between 2014 and the first half of 2016, they would have clawed their way back to their pre-crisis level by 2020-21.
But, as Johnson noted, that process has been choked off and even by 2022-23 real earnings will still be around £750 a year below where they were in 2007-08. Unless the economy performs better than expected, the IFS now thinks Britain is in danger of losing not just one, but getting on for two decades of earnings growth. This would be the equivalent of earnings being lower when John Major left Downing Street in 1997 than when Margaret Thatcher began 18 years of Conservative rule in 1979. Historically, it is without precedent.
As the IFS notes, everything depends on whether the OBR has got its forecasts right. Were the economy to grow by 2% a year, rather than 1% a year, the national debt would fall more quickly, the budget would be balanced by the middle of the next decade and earnings growth would pick up.
When measured by growth in incomes per head over the coming half-decade, Britain is expected to hold up the G7 league table. A better productivity performance of the sort Hammond says his supply-side policies will deliver would change that.
But, as the IFS noted, the OBR’s forecast for productivity growth in the years ahead is at around 1% a year, well above the post-crisis average of 0.3% a year. Johnson said it was hard to argue that the OBR’s judgement was overly pessimistic. The fear is that it might prove too optimistic.