I have been asking a few Ministers to tell me how much current public spending has gone up by so far under this government. So far no-one has been able to tell me it has gone up by £56 billion or 9.3%, 2011-12 compared to 2009-10. They have seemed rather suprised by the size of the increase.
Then they have said it must be a real cut. It is difficult to see how a 9.3% increase is an overall real cut, even at the current rate of inflation. We need to take into account the pay freeze, where pay is such a large element in public sector costs, and the better buying initiatives which are said to be keeping cost increases down. It is of course true that there are some cuts in some budgets within the growing totals. It is also true that some departments favour sacking some staff at considerable cost, and then hiring new people at further cost.
If you allow for the full 4.5% of stated CPI inflation (Ministers chosen measure), and then allow for some forecast drop in CPI inflation early next year as higher VAT falls out, you do not get to 9.3% inflation for the two years. RPI inflation is higher, but there ought to be a big offset in public sector costs for the pay freeze.
The issue before us is by how much will the deficit increase as lower growth is put into the forecasts? We know that the Office of Budget Responsbility is going to have to cut its growth forecasts again. These were last seen at 1.8% for 2011-12, 2.7% for 2012-13, and 2.9% for each of the following two years. That gives us 10.7% over the four remaining years of the plan.
Let us suppose growth this year is 1.0%, and then growth averaged 2.0% for the last three years. This is a moderate forecast by the standards of current forecaster gloom. That gives us 7.2% instead of 10.7%, or 3.5% less. That would imply that the government would have to borrow an additional £5 billion this year, an additional £9 billion for 2012-13, an aditional £14 billion in 2013-14 and an additional £20 billion in the final year to make up for lost revenue. That makes a total of £48 billion more borrowing, on top of the £485 billion planned for the five years of this Parliament.
It is also quite likely more spending would be needed, as there would be more people on benefits and other spending pressures from slower growth. We might need to add in another £20 billion of spending slippage. This means we could be in for a another £68 billion of borrowing, an increase of 14% for the period as a whole. This comes on top of the £34 billion increase in total period borrowing announced in the March budget.
The Treasury will say this is all allowed as the cyclical effects will be higher. It all, however, needs financing. It just goes to show how crucial growth is to getting down the deficit, if you want to do it mainly by increasing tax revenues rather than by cutting spending.
My advice was to have a small spending increase in Year 1, a 2% increase in year 2, then larger increases than the Coalition plans in Years 3-5, averaging 3% per annum instead of their 1.9%. This alternative would have cut borrowing back from the £485 billion planned for the five years thanks to lower spending in the first two years, whilst giving better spending increases in the second half of the Parliament.
Now the government has difficult choices ahead. How much of the slippage will it seek to erase by spending cuts or tax rises? I assume none. How much extra slippage in the short term will it permit, in an effort to buy some more growth? How many more EU one-offs will there be, like extra money for the IMF?