When it comes to independent assessments of the UK economy, few come with as much authority, or indeed independence, as those from the Institute for Fiscal Studies.
The cover of the Green Budget, its annual audit of the UK’s economic and fiscal situation, comes with endorsements from both Ed Balls and George Osborne. So those with time and enough interest in the state of the economy would be well advised to flick through the document’s 270 pages themselves.
For those without the time or inclination, here are a few highlights.
1. Real, punchy recovery
The economy will grow by 2.6% this year and by a very decent 3.2% next year, according to Oxford Economics, who provide the economic forecasts in the report (the IFS focuses specifically on government finances, welfare and other issues). It even expects last year’s 1.9% growth will be revised up. The bad news is that, so far at least, this growth doesn’t seem to be very balanced, reliant as it is mostly on consumer spending (itself partly fuelled by a raid on long-term savings as I revealed a couple of months ago).
These projections, it should be added, are reliant on the assumption that the economy is currently operating far below its normal capacity, which in turn means it has far more potential to bounce back in the coming years. Estimates of this so-called output gap differ enormously. But they are very important, since they lead to the next bullet point.
2. The end of the beginning of austerity
The upshot of this stronger growth is that the public finances look like they might soon get better or, at the least, won’t get much worse. In fact, for my money the most striking finding from the GB is that we’ve now finally got to the stage where the coalition government’s plans are enough to repair the damage done to the public finances by the crisis.
This is in some senses a watershed moment: after all, each successive Budget and Autumn Statement since 2010 has carried with it more bad fiscal news – whether that meant deeper cuts or an extra year’s worth of cuts. The IFS’s finding is that by now, even if the most pessimistic forecasters are right (in other words those who think the output gap is close to zero), the damage done to the deficit by the crisis will be put right by the coalition plans.
In fact, if the economy turns out rather better than expected, there might only need to be one more year (2014/15) of fiscal tightening (cuts or tax rises).
3. There’s still more pain
Planning more spending cuts isn’t the same as carrying them out, and the IFS has calculated that we are not even half-way through the total period of austerity, either in terms of time (2010-2018) or amount (10.1% of GDP target; 4.7% of that done). Which means that there will be plenty more pain to come in the next few years. In fact, the IFS has calculated that the impact of the cuts in spending on public services is likely to be greater than is currently appreciated, in part due to population growth and ageing.
It means that while overall public spending growth is due to fall 1.7% per year between 2010–11 and 2018–19 (to the lowest level since 1948, incidentally) the spending cuts per person will be 2.4% a year.
It’s a similar story for health spending. Although spending in real terms may not be due to fall under current government plans, the rising population, and the increase in number of elderly (and more expensive) patients means that there will be a 9.1% cut in real age-adjusted NHS spending per person during that same period.
4. No housing bubble…?
The Green Budget thinks that it’s not yet time to worry about a bubble in the housing market. It says that based on most measures (prices, prices vs earnings and inflation-adjusted prices) the housing market is still cheaper than before its peak in 2007. Some might argue (reasonably, I would say) that 2007 is no yardstick of where house prices ought to be. But the IFS’s main point is quite sound: that across the UK as a whole the housing market is still relatively depressed compared with recent years.
London, however, is another story entirely. In fact, one of the more interesting nuggets from the report is that in 2012/13 Westminster and Kensington & Chelsea alone contributed a full 15% of the UK’s entire stamp duty revenue. For that matter, another interesting and related nuggets, underlining the reliance of the Treasury on wealthy households, is that the share of income tax paid by the top 1% of UK earners has risen from 11% in 1979 to 27.5% in 2011/12. Given the wealthiest pay the lion’s share of capital taxes the overall proportion may be even greater.
5. The end of the ever-increasing personal allowance?
One of the coalition’s most eye-catching policies (originally it was a LibDem proposal) has been to increase the allowance of tax-free cash one can earn to £10,000. The Green Budget warns that increasing this allowance further (say to £12,500) would barely help the lowest paid at all. It says that “the lowest-income 17% of workers will pay no income tax in 2014–15 anyway”. Instead, the majority of the giveaway would go to families in the top half of the income distribution, or with no one in work (mostly pensioners).
Instead, it recommends raising the employee National Insurance threshold.