We need investment, not cuts, to deal with our fiscal headaches

Rather than using the forecast structural surplus to pay down the national debt, the government should invest it in science, skills and childcare.

The financial crisis and subsequent downturn had a huge impact on the public finances. In two years, from 2007-08 to 2009-10, public sector net debt jumped almost twenty percentage points from 37% to 56% of GDP. So when the current government came into power, it did so promising to mend our public finances. It set itself a fiscal mandate to eliminate the structural deficit and a supplementary target to have public sector debt falling by the start of the next parliament – 2015-16.

Poor growth has made these targets hard to achieve. But finally, after years of additional cuts have been pencilled in, there is some good news ahead of the Chancellor’s Autumn Statement on Thursday. Thanks to growth picking up, borrowing is looking better than expected. There are more cuts to come, but for once it’s looking likely that the government will be on track to meet the targets as set out in the Office for Budget Responsibility (OBR)’s last forecast without having to find more savings. Depending on what view the OBR takes of the growth we have had, the likelihood of meeting the mandate may even have risen.

Earlier this year, the OBR expected the fiscal mandate to be met by 2016-17. But what happens after that? The OBR forecast that the structural deficit would turn into a structural surplus of £15bn in 2017-18. It’s worth stopping to think about what this means. The structural part of the current budget is the part that doesn’t change as the economy goes through its usual cycle of downturns and upturns. A zero structural surplus would mean that the government balances its books over the course of an economic cycle. A structural surplus means that it goes even further than this – allowing it to pay down national debt. The Chief Secretary to the Treasury has pointed to the ageing population as the reason for continued austerity throughout the next Parliament. This could be a reasonable strategy. But it might not be the best one.  

The OBR’s Fiscal Sustainability Report, which looks at the long-term outlook for the public finances, shows the debt-to-GDP ratio nicely falling for around a decade after 2017-18, but as the ageing population kicks in, it’s set to sharply rise again in the 2030s, driven by rising health, social care and pension costs. By the early 2060s, public sector net debt is set to hit nearly 100% of GDP.

These levels make our current problems seem rather small in comparison. And they also raise the question of whether the ageing population is something that can really be tackled through cuts alone. The OBR numbers show that if we can boost the economy’s productivity, debt wouldn’t start rising until around two decades later. But in recent years, our productivity growth has been sluggish. If it doesn’t pick up, we may even fail to meet the OBR’s central case scenario. 

So there are big gains to be had from boosting our long-term productivity. The £15bn could be used to treble the science research budget, treble our adult skills budget or introduce universal childcare, enabling more parents to go out to work – with money still left over. The choice isn’t straightforward.  The Chancellor – and future Chancellors – are facing a new trade-off, one where too little investment now could risk a huge fiscal headache in the future.

George Osborne speaks at the Conservative conference in Manchester earlier this year. Photograph: Getty Images.

Nida Broughton is Senior Economist at the Social Market Foundation.

Photo: Getty
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Shock Wales YouGov poll shows that Labour's Ukip nightmare is coming true

The fear that voting Ukip would prove a gateway drug for Labour voters appears to be being borne out. 

An astonishing new poll for the Cardiff University Governance Centre and ITV Cymru shows a historic result: the Conservatives ending a 167-year wait for an election victory in Wales.

The numbers that matter:

Conservatives: 40 per cent

Labour: 30 per cent

Plaid Cymru: 13 per cent

Liberal Democrats: 8 per cent

Ukip: 6 per cent

Others: 3 per cent

And for context, here’s what happened in 2015:

Labour 36.9 per cent

Conservatives 27.2 per cent

Ukip 13.6 per cent

Plaid Cymru 12.1 per cent

Liberal Democrat 6.5 per cent

Others 2.6 per cent

There’s a lot to note here. If repeated at a general election, this would mean Labour losing an election in Wales for the first time since the First World War. In addition to losing the popular vote, they would shed ten seats to the Tories.

We're talking about a far more significant reverse than merely losing the next election. 

I don’t want to detract from how bad the Labour performance is in a vacuum – they have lost 6.9 per cent of their vote on 2015, in any case the worst election performance for Labour in Wales since the rout of 1983.  But the really terrifying thing for Labour is not what is happening to their own vote, though that is pretty terrifying.

It’s what’s happened to the Conservative vote – growing in almost every direction. There is some direct Labour to Tory slippage. But the big problem is the longtime fear of Labour MPs – that voting for Ukip would be a gateway drug to voting for the mainstream right – appears to be being realised. Don't forget that most of the Ukip vote in Wales is drawn from people who voted Labour in 2010. (The unnoticed shift of the 2010-5 parliament in a lot of places was a big chunk of the Labour 2010 vote went to Ukip, but was replaced by a chunk of the 2010 Liberal Democrat vote.) 

If repeated across the United Kingdom, the Tory landslide will be larger than the 114 majority suggested by the polls and a simple national swing.

As I’ve said before, polls are useful, but they are not the be-all and end-all. The bad news is that this very much supports the pattern at elections since the referendum – Labour falling back, the Tories losing some votes to the Liberal Democrats but more than making up the loss thanks to the collapse of Ukip.

The word from Welsh Labour is that these figures “look about right” at least as far as the drop in the Labour vote, though of course they have no idea what is going on with their opponents’ vote share. As for the Conservatives, their early experiences on the doorstep do show the Ukip vote collapsing to their benefit.

One Labour MP said to me a few days again that they knew their vote was holding up – what they didn’t know was what was happening to their opponents. That’s particularly significant if you have a “safe seat” but less than 50 per cent of the vote.

Wales has local elections throughout the country on 4 May. They should provide an early sign whether these world-shaking figures are really true. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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