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IFS Green BudgeT: Dramatic spending cuts in sight

Staff writer ▼ | February 7, 2014
The UK Chancellor's decision to extend the fiscal consolidation through to 2018-2019 means even more dramatic spending cuts are now planned, according to the IFS Green Budget, funded by the Nuffield Foundation and produced in collaboration with Oxford Economics.
George Osborne
George OsborneThe UK Chancellor's decision to extend the fiscal consolidation through to 2018-2019 means even more dramatic spending cuts are now planned, according to the IFS Green Budget, funded by the Nuffield Foundation and produced in collaboration with Oxford Economics.


By the end of this financial year only 40% of planned spending cuts will be in place, says the study. Even with 12 billion pounds a year of additional cuts to social security spending, George Osborne's plans would imply cuts of more than 30% in "unprotected" public service budgets since 2010.

The government has already made additional spending commitments of more than 6 billion pounds a year after 2015–16, implying additional cuts elsewhere.

The population is projected to grow by about 3.5 million between 2010 and 2018. So while public service spending is set to fall by 1.7% a year over this period, public service spending per person is set to fall by 2.4% a year.

Over the same period, the number of individuals aged 65 and over, who, on average, place greater demands on the NHS, is set to grow by two million. We calculate that, even if the overall NHS budget continues to be frozen in real terms, real age-adjusted health spending per person would be 9% lower in 2018–19 than in 201020-11.

There are also policy risks on the tax side. The government's revenue forecasts assume that fuel duties rise each year with inflation. If, as recent history suggests, this does not happen, 4.2 billion pounds a year would need making up by 2018–19. And further significant increases in the income tax personal allowance would be expensive.

Harder to quantify are the risks associated with the increasing reliance on a small group of very rich taxpayers. The share of income tax paid by the top 1% of taxpayers rose from 11% in 1979 to 27.5% in 2011–12. The income tax alone paid by these 300,000 very high income individuals accounts for 7.5% of all tax revenue. These individuals will of course also pay a large fraction of VAT and capital taxes.

Much of the expected increase in underlying revenues over the next few years is projected to come from growth in capital taxes, which are notoriously difficult to forecast. More broadly, government is becoming increasingly reliant on the three main taxes – income tax, VAT and National Insurance contributions (NICs) – which will account for two thirds of all revenue by 2018-2019.


 

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