Fiscal choices from IFS

 
Cash The deficit in 2014-15 is now forecast to be £64bn more than he originally planned

The great value of the annual Green Budget from the Institute for Fiscal Studies (IFS) is that it spells out in black and white the fiscal choices implicit in government policy, some of which will come as a surprise - even, perhaps, to ministers themselves.

It also shows us the choices that ministers will probably have to make in the future, or would, if they were they not burdened with that irritating desire to be re-elected.

Here's one choice that has been hiding in plain sight: the chancellor is no longer pursuing Plan A, and has not been for some time.

The reality, underlined in this report, is that George Osborne has faced a big deterioration in the underlying state of the public finances since 2010, which he has decided to do almost nothing about this side of a general election.

The worsening in the economic picture since 2010 has led to a £65bn increase in borrowing by 2014-15. As the IFS notes, Mr Osborne is planning to offset just £1bn of that. So the deficit in that final year of the parliament is now forecast to be £64bn more than he originally planned - an overshoot of close to 4% of GDP.

You might not call that Plan B: after all, he has not actually reversed any of the big spending and tax decisions of summer 2010. And he has pencilled in two or three more years of pain from 2015 onwards. But it's not Plan A either: for better or worse, fiscal policy between 2010 and 2015 is going to be quite a lot looser than Mr Osborne planned.

In fact, the IFS point out, mischievously, our current chancellor's policy is even too loose to meet the terms of Labour's own Fiscal Responsibility Act of 2010, which imposed legal sanctions for failing to meet various debt and borrowing criteria.

To avoid legal sanctions under that legislation, Mr Osborne would have needed to find another £8bn a year in tax rises and spending cuts. (Which rather makes me think Labour might have had to repeal it too, had it won the election.)

Another IFS observation that some ministers may be surprised by: the social security budget is rising, not falling over the course of the government's austerity programme, both in real terms and as a share of government spending.

It accounted for 28.5% of all spending in 2010-11. By 2017-18 that is expected to have risen to 32.5%. Due, in part, to the coalition's determination to protect them, pensioner benefits will account for well over half of that total. As the report points out, barely 25% of those benefits are means tested, compared with 80% of benefits for people of working age.

I said the Green Budget also told us the choices the government will need to make in future, or would make, if it were made up of IFS pointy heads rather than politicians.

There are plenty of those in this 330-page report, and also plenty of traditional IFS finger-wagging about the lack of a truly coherent tax policy, and the government's inconsistent approach to things like indexation. (The government's approach to indexing rents for housing benefit, for example, the authors find "difficult to square with any intelligible policy objective". 'Twas ever thus.)

But the big choices coming down the track are not hard to spot for any disinterested reader of this report. Any such person would conclude, for example, that the government was going to squeeze the welfare budget more than currently planned after 2015, and raise taxes more as well, for the simple reason that without these extra sources of revenue, the cuts that would be needed in unprotected departmental spending look simply unmanageable.

When it comes to cutting welfare, benefits for better-off pensioners have had a lot of attention. But, as the authors point out, they account for a tiny share of overall spending on pensioners. Means testing could raise maybe £1bn to £1.5bn, at best. Not to be sneezed at, but quite a small reward for all that political flak from the over-65s.

And raising taxes? The report points out that the vast majority (85%) of tax revenues already come from people in the top half of the distribution, but if the government wants to raise more from them, raising the basic rate of income tax for the first time in 40 years would be a decent place to start. You could raise £5bn from raising it by 1p, most of it from people on higher incomes.

Incidentally, the IFS gives the lie to the government's claim to have lifted more than a million people "out of tax" with the big increases in the personal allowance since 2010-11. In fact, the IFS notes: "no earners have been taken out of the direct tax net" by this generous (not to mention expensive) tax cut. That is because the people affected still pay national insurance.

The authors also rebut the idea that these changes to the personal allowance have been "progressive": "The largest average gains - in cash terms and as a percentage of income - go to those in the middle and upper-middle of the income distribution."

It's a small point, admittedly. A lot smaller than many others flagged up in this report. But it is another reminder of why the IFS is a useful institution to have around.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    +2

    Comment number 19.

    Nothing will be done, as soon as Bankers start threatening this Govt that they will move to Singapore etc they retreat and start having lunch with them. Then the next day we will get the predictable, rehearsed Tory "good Kop bad Kop" where Flashman and the Blonde Mop will say we have to stop "banker bashing", and nothing will change. The Banks know they are dealing with a failed one-term Govt.

  • rate this
    +1

    Comment number 18.

    Ultimately, I suspect, the investment banking arm will split from the commercial banking. No win for the man on the street though, as the remaining retail banks will still be a small numbered cartel like the rest of UK utilities with high charges and by then monthly current account fees.

  • rate this
    +13

    Comment number 17.

    Wonderful lets impose a solution, that has little basis in evidence, to solve yesterday's problem rather than thinking about tomorrow.

    Bank failure in UK had nothing to do with whether they were retail or investment banks. Ring fencing is a mirage.

    Banks failed because management had no idea what risks they were running and down graded risk management.

  • rate this
    +2

    Comment number 16.

    "Mr Osborne is accepting the Tyrie Commission's suggestion to "electrify" the new ring-fence between banks' risky, investment banking-type activities & their retail operations."
    Huge investment banks too big too fail carry an albatross: corruption e.g. Libor. no fence can stop them; they MUST BE BROKEN UP - strictly retail vs investment gambling.

  • rate this
    +4

    Comment number 15.

    The only way any financial system of any kind on earth can work is through trust and if they don't keep faith they will be doomed.

  • rate this
    +14

    Comment number 14.

    Ah yes, ring-fences...

    The Mirror Group Pension Fund was supposed to be totally 100% ring-fenced wasn't it? It didn't hold Robert Maxwell up for long.

    There's no such thing as a totally secure ring-fence, "electrified" or not.

  • rate this
    0

    Comment number 13.

    Inter connectedness between the world's banks caused the contaigon to spread so widely.

    If we banned, globally, banks lending to each other we would isoltae future risk to the odd bad bank.

    But if we do that we can't ring fence investment/retail as investment arms need their capital from somehwere.

    If we can't have no inter bank lending then ring fence is the next best interim measure....

  • rate this
    +2

    Comment number 12.

    don't worry you will only die if you do not repent. basically what people want is a safe for their wealth or a reward for their investment of effort and if they don't get one or the other through trustworthy relationships, there literally is no foundation to build any society upon whatsoever. If it's not a 'credit crunch' the next crisis will be 'the monster munch'.

  • rate this
    +3

    Comment number 11.

    Would it not be a lot simpler to remove banks that trade (gamble) on their own account or lend to banks that do from the scope of the Financial Services Compensation Scheme?. Depositors would then move their money to the safer banks, which would force the break up of the others without need for complex legislation.

  • rate this
    -1

    Comment number 10.

    75 year cycles require 75 years crystall-ball economic growth. 75 years to the Great Depression; 75 years since the end of the US Civil War; 75 years to American Independence. It is time for Australia+Britain+ Canada to coordinate their combined economies to fill the void that USA and USE leave behind in their ego-mania.

  • rate this
    +8

    Comment number 9.

    Until we see bonuses that reflect the effort and work put into the job and not the proceeds of gambling then you can forget any seismatic shift in bank and their employees attitudes

  • rate this
    +9

    Comment number 8.

    This will have no effect on the culture of the banks and the banking lobby will water it down before implementation. More important news is the way Barclays avoided the need for taxpayer funds in October 2008 with a deal with Qatar and the resignation of it Finance Director today. Let’s have some more information on the investigation by the FSA into that. Another banking scandal in the making?

  • rate this
    -2

    Comment number 7.

    in ye olde days (there is a lot of history to draw from) the apostles of Jesus Christ the messiah lord and saviour asked everyone in their churches (who were believers) to save a little each week 'as the lord prospered them' which they then to'd and froe'd between the 7 or 8 major congregations they were all tee total monogamous straight married couples mind with a few genuine widows and orphans.

  • rate this
    +5

    Comment number 6.

    The ring fence we should worry about is the one that protects the bankers from the economic consequences of their own actions, from the law, from their customers, from shareholders, ... and, above all, allows them to go on making money (literally) from considerably less than old rope.

  • rate this
    -2

    Comment number 5.

    "The first is that this represents a big climbdown for the chancellor"

    Expect to see more of these as his record is exposed daily of this incompetent Govt's failures, from increasing DEBT, to a failing Economy. He is just doing his bit to try & hang onto his job as long as he can! The U-turns will keep coming! This is short term Political posturing only.

  • rate this
    +5

    Comment number 4.

    UK Banking Reforms: What's New?

    Short answer, nothing much. Just schpiel and rhetoric. There always seems to be a way around new regulations for banks. Our banking system is much like a leaky roof. Doesn't matter how many plasters you plug the holes with, at some point you're going to have to fix the bloody thing properly!

  • rate this
    +1

    Comment number 3.

    If there is nobody you can trust with your money society will tear itself apart form small enclaves and revert to the stone age.

  • rate this
    +9

    Comment number 2.

    Announcing that the notion of electrification of the ring fence is accepted and then actually switching on the current are entirely different matters.
    I am cynical enough to expect that faced with the first bank to threaten offshoring itself as a result that the current will be reduced such that the livestock will find the fence no barrier at all.

  • rate this
    +4

    Comment number 1.

    Nothing is new.
    Worse, nothing is being done to sort out the cartel rip off arrangements, nor the destruction of our economy.
    First, mortgages are currently from 3-5% above base depending on your deposit - what a total rip off.
    Second business loans and credit cards are even worse (credit cards at 20+%)
    Third, they are first in line when receivers go in, so lose nothing- unlike everyone else.

 

Page 14 of 14

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.