The Institute for Fiscal Studies’ big annual report, which surveys the state of the UK economy and public finances, came out this morning. It’s a chunky document, which can be downloaded here, but if you’re after a digested read, here are some of the main points in seven easy-to-understand* charts.
1. There’s still a lot more austerity to come…
Whichever party win the election, they will impose austerity. The chart above shows the plans currently slated as of last year’s Autumn Statement. What they show is that by the end of the Parliament about 55% of the work will have been done, leaving 45% yet to be done.
2. Britain faces the biggest cuts of any major economy next Parliament
Perhaps the most striking table in the report concerns how Britain’s spending plans for the following Parliament compare with other countries. The IFS has found that the structural deficit reduction thus far has been the seventh deepest in the world; but that the reduction slated for the following four years will be deeper than anywhere else. A sobering thought.
3. Then again, it may not happen…
There’s a big disconnect right now between the fiscal rules the Tories have set themselves for the next Parliament and the fiscal plans they actually laid out in the Autumn Statement. So we are slightly in the dark as to whether the austerity over the next five years will be closer to the dotted line above or the green cross, which denotes the Conservatives’ potential spending under their new fiscal rule.
Nonetheless, at least there is a bit of difference between the political parties this time around. In short, the Conservatives want to achieve an overall surplus by 2018 while Labour and the Lib Dems have slightly less ambitious deficit-cutting plans. To put it another way, they want to borrow more and cut less in the medium term. Or to put it another way entirely, the Conservatives want to reduce Britain’s net debt more.
But what this comes back down to is the question of whether the Conservatives really intend to reduce the size of the state to 1930s levels – or whether they will be slightly less aggressive when it actually comes round to it. After all…
4. The actual austerity imposed this Parliament was even less than planned by Labour in 2010
This chart compares the path of austerity planned by Alistair Darling in his last Budget in 2010 (the grey line) with the latest plans, as implemented by George Osborne. You can see that in actual fact borrowing has fallen less quickly than had been planned by Labour back in 2010. It is worth saying, however, that this is not entirely down to a lack of ambition on the part of the coalition government. It also stems from the fact that the UK economy weakened considerably in 2011, meaning tax revenues fell, and there was suddenly even more work to be done to get Britain back in balance.
5. High debt, low interest rates
The chart below underlines the arguments both sides are making. That green line shows you how the national debt is up at the highest level since the 1960s. The Tories say it’s essential to start getting it down, hence why they want more austerity than Labour or the LibDems in the coming years.
However, because interest rates are so low at the moment, the cost of servicing that debt (the yellow line) is still very low indeed. Which is why Labour says the Government is still relatively safe in borrowing and spending more – particularly if that money is put towards public investment.
6. Most of the austerity is taking the form of spending cuts
Around the time of the 2010 election the Conservatives talked about ensuring that when it came to austerity it was best to try to do most of the work through spending cuts rather than tax rises. It talked about an 80-20 ratio between spending cuts and tax rises. Well, as time has gone on and its plans have changed, it has done more of the work through spending cuts than austerity, such that that ratio is now far closer to £1 of tax rises for every £9 of spending cuts.
7. But most elections are followed by tax rises
Past experience (as illustrated in the chart above) is that Governments tend to raise taxes immediately after elections. That’s what happened in 2010, 2005, 2002, 1997 and 1993. So if past is prologue one might expect a similar thing to happen in 2015, whoever wins the election.