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A give and take Autumn Statement?

Rowena Crawford, Carl Emmerson, Soumaya Keynes and Gemma Tetlow

Now scheduled for December 5, the Autumn Statement is – for the third year in a row – set to be a “fiscal event” as the Chancellor George Osborne provides more detail on the giveaways announced during the party conference season. The data so far this year – including today’s public finance numbers – suggest that we can expect to see a welcome upwards revision to the forecast for economic growth and a downward revision to the forecast for the headline deficit. But any improvement will be small relative to the level of the deficit forecast in the Budget, and the deficit this year will still be very high by historical standards and relative to what was projected at the start of this Parliament and compared to what the Chancellor is ultimately hoping to achieve. So as he prepares for the Autumn Statement, if the Chancellor is planning to make good on the promises of giveaways made during the party conference season he should also be considering ways of raising revenue to pay for them.

The March Budget forecast – produced by the Office for Budget Responsibility (OBR) – was that the UK economy would grow by 0.6% in 2013, which was similar to the 0.9% average of independent forecasts surveyed by the Treasury in the previous month. The latest survey of independent forecasters – published on November 18 – suggests that the average growth rate now forecast for this year is 1.4%, an increase of 0.5 percentage points since the Budget. The Bank of England has also revised up its expectation of growth in 2013 by a similar amount: from 0.9% in February 2013 to 1.4% in November 2013. The outlook for growth in future years has also, on average, been revised upwards too.

The monthly data on the public finances since the Budget suggest that the headline deficit is also set to be better than the OBR’s Budget forecast. Central government receipts would need to grow by 2.8% in 2013–14 for the OBR’s forecast to be correct. The data from the first seven months of this financial year suggest that they have in fact grown by 4.6% compared to the same period last year. Receipts from National Insurance contributions, self-assessment income tax, and stamp duty land tax have grown particularly strongly over the last seven months compared to the OBR’s forecast for the year as a whole and easily outweighs a more than £2 billion shortfall in receipts from the Swiss capital tax arrangement.

Should central government receipts continue to grow at this rate for the remaining five months of this financial year (which of course they might not), and if the OBR’s forecasts for public spending and for other receipts were to prove accurate (which again they might not), then the deficit this year would be £7 billion lower than the Budget forecast. An error of this magnitude would be impressively small – at least compared to the historical record of the Treasury who, on average, made an absolute error in projecting borrowing one year out of around 1% of national income or £16 billion in today’s terms.

Of course even if the deficit forecast for this year is revised down by £7 billion, it would still be £113 billion, which – at 6.9% of national income – would be the fourth largest UK deficit seen between the end of the Second World War and 2008–09. Furthermore, a deficit of £113 billion in 2013–14, while lower than projected in the March Budget, would still be substantially higher than the £60 billion that Mr Osborne projected for this year at the time of his first Budget in June 2010.

When considering the scope for permanent net giveaways in the Autumn Statement, what matters is the extent to which any reduction in borrowing this year feeds into lower expected borrowing in future. The Swiss tax was largely one-off so the shortfall here will not persist, suggesting that underlying revenues could be £9 billion higher than previously forecast. One reason why they might not is that the OBR could judge that faster economic growth this year simply means less spare capacity remains – that is there is now less scope for the economy to grow before inflation pressures return. In this case, its growth forecast for future years ought to be revised down, and any additional strength in revenues this year compared to what was previously forecast might not persist indefinitely. The faster growth in 2013 can explain just under half of the faster growth in revenues this year, which could suggest that only around £4 billion of the £9 billion strengthening in revenues might persist into future years. Of course the OBR could judge that the faster growth this year has not been associated with much, or indeed any, reduction in spare capacity this year. In that case, more of the lower projected deficit this year might be considered to be permanent rather than temporary – giving more scope for permanent giveaways.

No doubt Mr Osborne would like to be able to use any fall in borrowing to justify a significant net giveaway in the Autumn Statement: not least because of the cost of the measures announced at the Liberal Democrat and Conservative Party conferences. In total three significant policies outlined at these party conferences imply a giveaway of around £2 billion a year, including: universal free school meals for those in their first three years at primary school from September 2014 (£600 million a year); a transferable income tax allowance for some married couples from April 2015 (£700 million); and an aspiration to cancel the increase in fuel duties currently planned for September 2014 (£700 million).

So, should Mr Osborne implement all these measures – and possibly more – without any offsetting tax rises or spending cuts? In both Autumn 2011 and Autumn 2012 Mr Osborne reacted to a worsening outlook for the public finances by allowing projected borrowing to rise considerably over this parliament and pencilling in further spending cuts for the next parliament. A symmetric approach to good news would be to plan to borrow less in this parliament and to reduce the amount of austerity planned for the next.

Mr Osborne also announced in conference season a desire to eliminate the total deficit by the end of the next parliament, so as to hasten the reduction in public sector net debt. The OBR’s March 2013 forecast was that the deficit would still be at £42 billion in 2017–18. That is to say, even after the implementation of all the austerity measures already announced up to 2015–16 plus those spending cuts pencilled in for 2016–17 and 2017–18, considerable further austerity (requiring either a further two year freeze in total public spending or a further net tax rise) would still be needed to meet Mr Osborne’s proposed new deficit target. So perhaps any talk of pre-election giveaways should wait.

IFS public finance observations are generously supported by the Economic and Social Research Council (ESRC).

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