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

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  • rate this

    Comment number 39.

    Tell the Banks the new rules, and let them - and their depositers- know that only banks that played by the rules would have the goverment underite the deposite of their customers. The public would then have an interest in how Banks do their business.

  • rate this

    Comment number 38.

    "When will we know that the UK has truly put the financial crisis behind it?"

    When all the banksters, responsible for the biggest con in history prior to the crash, (and more recently Libor and money laundering) have been tracked down and jailed (not gently admonished).
    When the money has been returned with interest..
    When actual measures are in place to prevent them doing it all again.

  • rate this

    Comment number 37.

    This is good progress but still not far enough. There needs to be complete separation between retail and investment banking.


    Yes but.
    Define retail and investment.
    In a way that can be legislated.

  • rate this

    Comment number 36.


    Depends what is in the burger? Beef, ham, horse, taxpayer? Who knows?

    Partnership is a point well made.

  • rate this

    Comment number 35.

    How will this ring-fence stop a determined CEO & complacent or supportive Board going after an acquisition, paying too much for it, finding a part of it defective and then having other investors sell their shares down to the point where they cannot attract the capital they need to stay in business?

  • rate this

    Comment number 34.

    Why not simply remove all the obstacles for new new entrants.

  • rate this

    Comment number 33.

    28,29 +

    False Pretences!

    Fiddling risk is just another form of pretence designed to defraud! It goes to the heart of capitalism & this is why a decade or more of market manipulation with the aim of falsely presenting a bad risk as a good one is such a genuinely heinous act.

    In any other field those responsible would be hauled before the courts & expect to spend their natural life in poky.

  • rate this

    Comment number 32.

    So we have waited 5 years for this ?

    As was said back then this is not about reforming the banks its ensuring they survive.

    Nothing will change with this absolutely nothing and it shows the contempt Osborne and Parliament in general have of us if they think this is a reform.

    and as for the BBA there comments are a make us believe this in some way harms the banks.

  • rate this

    Comment number 31.

    We need a Gummer test: If there's nothing to worry about, let's watch your daughter eat a burger. If we're going to give access to the Bank of England's funds and underwrite systemic risk, the burger is the personal wealth of those who seek to earn vast sums at taxpayer expense. Losing future bonuses is insufficient: partnerships controlled risk-taking because partners risked losing all wealth.

  • rate this

    Comment number 30.

    This is good progress but still not far enough. There needs to be complete separation between retail and investment banking.

    In trying not to spook the industry with proper regulation Osborne is trying to be reasonable. He is fooling himself. If his electric fence has to be used just once then it has failed as policy.

    The banks need to be broken up. We won't get the money back.

  • rate this

    Comment number 29.

    Risk Fiddling

    We need a regulatory that prevents the actors in the market falsely representing risk and so underpricing. This is the root cause of the bubble/crash and should have been spotted & blocked by the existing regulators if they hadn't been asleep.

    PS this is what both Libor fiddling and sub-prime mortgage bundling deceptions were about! The presentation of a bad debt as a good one!

  • rate this

    Comment number 28.

    Remember NR.

    NR was getting money far far too cheaply & so providing insanely under-priced under-risk-assessed mortgages (& paying far far too little for its retail money to savers.)

    The whole banking sector has been manipulating the markets to falsely represent risk. This market prevision has collapsed capitalism - BECAUSE the price of money was nowhere high enough to represent the real risk.

  • rate this

    Comment number 27.

    What's new? Abut the same as US!
    Frontal assault on the working class. Awash in cash, corporate & financial elite insist no money for health care, pensions or decent wages. Basic rights must be eliminated to ensure continued flow of funds INTO THE BANKS. Millions of people in austerity. Yet enormous corporate profits, are not reinvested. Cash is funneled into stock:
    DOW 14,000! Hogwash!

  • rate this

    Comment number 26.

    I think it is funny that we pretend to be civilisation.

  • rate this

    Comment number 25.

    They don't really want to split up the banks, if they did then that's what they'd have done.
    Even if they break the rules there is no automatic way the sanction kicks-in...Its going to be 'up to the regulator' so we all know what that means.
    As soon as one bank pushes their luck and gets away with it the low voltage electric ring-fence will short it was obviously designed to!

  • rate this

    Comment number 24.

    What's new?

    Yet another watering down of the Vickers minimum recommendations.

    I remind everyone that NR was using the investment market for synthetic financial products to provide the funding it was using to run its high street business.

    The changes recommended for the very distant future would have not prevented the NR bust!

    The basic problem is that the price of money does not reflect risk.

  • rate this

    Comment number 23.

    And still our City colluding cross party political sell outs continue to paint the picture that they'll sort it out

    They won't.

    The Ponzi remains way too bust to save - and still all us plebs are being offered is long term inflation and relatively increasing poverty so the bankstas can carry on pretending their re-hypothecated derivatives con games are anything other than a rigged betting scam

  • rate this

    Comment number 22.

    We need to bring back compulsory unlimited liability for those who choose to suck on the Bank of England's teats, even if we can't go back to traditional partnerships. For centuries, Stevenson, Godwin, Hornby, Appleby et al would have been financially wiped out and their homes repossessed, savings conviscated, etc. If we can't trust them to make their word their bond, the bankers must face ruin.

  • rate this

    Comment number 21.

    What's new? Good question!
    Between revelations of mounting losses ($5.8B & rising) at JP Morgan in face of bungled bets by a trader known as "London Whale", allegations of money laundering for Mexican cartels & breaches of US sanctions by HSBC, disclosures of rigging Libor rate by Barclay’s Bank...All these + more expose rot in global financial system.
    Ring-fencing sounds pathetically weak!

  • rate this

    Comment number 20.

    People don't want to lose their grip on modern technology and that's the only thing holding the rickshaw together nobody would admit to anything being exactly foolproof.


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