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3 December 2014

Planned spending cuts go far beyond what is needed to end borrowing

The big news is what George Osborne didn’t mention.

By nida broughton

Growth is up this year – but in return will be lower than expected in previous years. Tax receipts have disappointed, and have been revised downwards in the coming years too. This much was generally expected. But the good news is George Osborne is still on track. Statistical revisions this year have helped a bit. Lower than expected interest payments have helped a lot.

The coalition plan is still in line with the Conservatives’ mission to eliminate borrowing by 2018-19. Public sector debt is expected to start falling in the middle of the next parliament. But to keep up with borrowing targets when taxes are looking weak, more cuts are being pencilled in – from 2016-17 to 2018-19, departmental spending is being squeezed even further than previously expected, by around £5.8bn a year on average.

But there is more going on here than simply some extra cuts being pencilled in (yet again) to ensure that the public finances stay on track to meet the fiscal targets.

Not mentioned in the Chancellor’s speech, but quickly apparent from the OBR’s report is that the current government is planning spending cuts that would go far beyond what is needed to eliminate borrowing. Although borrowing will have turned into a surplus by 2018-19, the OBR’s figures show that the current government plans to keep cutting beyond that, to create an overall annual surplus – after including investment as well as day-to-day spending – of over £23bn by the end of the next parliament.

Compared to holding departmental spending flat as a share of GDP, that amounts to a cut of £14.5bn. The result is that the government is now only 40 per cent of the way through its cuts to departmental spending, with the OBR expecting the remaining 60 per cent to come after the election.

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What exactly are the Conservatives trying to achieve here? Their plans appear to go far beyond even what fiscal conservatives would view as strictly necessary. Even their plan to entirely eliminate borrowing, including borrowing to fund investment that boosts growth, is questionable.

IMF research shows that government investment, such as spending on infrastructure, can raise GDP with no overall rise in public debt. So a target to entirely eliminate borrowing for investment makes little economic or fiscal sense. And given that we have somehow managed to reduce government interest payments whilst debt is still increasing suggests that now is still an excellent time to borrow for investment in growth.

The government has given the public no rationale for these extra cuts. As a proportion of GDP, government spending is being taken back to the level last since in 1938. If there was room for doubt before, there appears to be little now. A dramatically smaller state, not fiscal credibility, is the real goal here.

Nida Broughton is Chief Economist at the Social Market Foundation