Author: johnredwood

In 2010 I pointed out that public spending was going up every year of this Parliament in cash terms. I also forecast that this government would control the costs of public spending better than the previous government, so real current public spending would also rise. Most commentators, politicians and journalists thought this wrong and talked about the real terms cuts to come.

The OBR now confirms that real public consumption rose 2010-2013 inclusive at a rate of 1% per annum. They state ” Real government consumption continues to contribute positively to GDP growth despite ongoing restraint in nominal spending. “(restraint here means modest increases). (pp 79-80 of the OBR book)

The OBR also says that in the next Parliament the plans in yesterday’s statement should mean continued control over the costs of public services, which limits the impact of the future restraint on cash public spending on its real level. Indeed they expect the costs of provision to fall, as they assume productivity and technology gains in delivery of services. What is odd is that we did enjoy such gains in the previous decade.

It is curious that no-one else seems to read this section or use it in the debates on what has happened and what might happen to public spending, presumably because it stands in the way of the austerity and cuts stories. Whilst it is obviously true that some budgets have been reduced and some may be reduced in the next Parliament, the overall position is now confirmed that both cash and real public consumption has risen. Capital spending, which was cut sharply by the outgoing Labour government, remained cut at the beginning of this government but has now benefitted from substantial increases from the new lower base.

The Autumn Statement plans for the next five years are very like the 2010 Coalition plans to eliminate the deficit. They rely on modest cash increases in total public spending and large increases in tax revenue, mainly coming from economic growth. The approach so far has succeeded in controlling spending within the totals set out, but tax revenue as we have seen has fallen well short.

The Green Book provides a full five year profile of spending and taxing. It shows public spending continuing to rise in cash terms, by £42.8bn or 5.8% over the period to 2019-20. Revenue is forecast to rise by £140.8 bn or 23% with the big gains coming from Income Tax, VAT and National Insurance.
This enables the government to forecast the end of the deficit by 2019-20, with the current deficit disappearing in 2017-18.

The original plan to bring down the deficit was explained as relying mainly on spending cuts. This was calculated by looking at inherited planned increases in public spending and in real terms. In practical terms the government planned to increase public spending, but to increase tax revenue at a much faster rate, mainly by economic growth, to eliminate the deficit. For the next Parliament the plans assume tight control of public spending, with only modest increases in the cash spending amounts. Once again the main method of cutting the deficit in cash terms is an anticipated substantial increase in tax revenues from economic growth.

There is little leeway in the figures for any new government to spend more without having to borrow more. Hitting the tax forecasts will require a long period of good growth, and setting tax rates that remain internationally competitive. Many of the individual taxes have fallen short of expected receipts over the last four years. The latest forecasts show the impact of lower oil prices on falling oil tax revenues, and assume some increase in revenue from the anti avoidance measures and new corporate taxes set out in this Statement.

The CGT receipts have been well below the peak levels prior to the 2008-9 Crash, illustrating that lower rates raise more revenue. The self assessment and top end income tax receipts have fallen well short, suggesting the 50% rate reduced receipts. VAT has been buoyant, with the higher rate bringing in more revenue as planned and a bit more on top. This government’s experience shows that you have to judge carefully which taxes will bring in more if you raise the rate. The Stamp Duty changes will have a substantial impact on the property market and it will be interesting to see what happens to revenues there.

The Coalition came together to cut the deficit. So far they have kept their spending increases within plans, but have experienced a shortfall on receipts, so the task is half done.

The Autumn Statement provides a suitable opportunity for all main parties to set out their intentions for the next five years. Would any wish to go further and faster in curbing spending? Do any want to go faster with tax rises? Do any have a way to boost tax revenues with lower or similar rates, through promoting growth?

The UK economy needs to develop higher productivity, which in turn can lead to higher pay. The efforts going in to strengthen education and training, to improve the science base, to bolster manufacturing and to make it more worthwhile to work are all policies designed to foster more and better paid jobs, which are the key to economic improvement and to lower welfare and benefit spending.

The main policies revealed by Labour and Liberal Democrats reveal nothing of substance about how they wish to tackle the deficit. Labour’s cuts are tiny, and their tax rises all absorbed by spending pledges. In addition Labour wrongly think increasing the top rate of Income Tax to 50% would increase revenue, when history shows it would cut receipts. The Lib Dem’s Mansion Tax will not make a lot of difference to total revenue.

The Conservatives have got furthest in talking about the magnitude of public spending reductions they will need to eliminate the deficit in the next Parliament. The OBR figures today will show us where the government thinks it has reached on the long road to balanced books.

In the 2010 budget the Chancellor forecast Income tax receipts of £158.4 bn from PAYE and £35.1bn from self assessment for 2014-15. In March 2014 these forecasts had fallen to £142.2bn and £27.2bn. This decline of £18.4 bn reflects the decision to raise Income Tax thresholds more, cutting Income tax receipts from lower earners. It also reflects the higher top rate of tax which has collected less revenue than expected, and less than a lower rate would have collected.

In 2010 the government forecast £1.6bn of Petroleum Revenue Tax for 2014-15, recognising the likely fall in oil tax revenues.Today we must be looking at a figure of practically nothing, given the decline in output and in the oil price.

In 2010 the forecast was for £33.4bn of fuel duties. They are now forecast at £26.8bn following successful campaigns to cut the rates.

Value added tax was put up, and this has both increased the revenues and resulted in outperformance of the forecast for money raised. National Insurance is £10 bn down on the 2010 estimate for 2014-15, despite the increase in employment. Offshore (oil based) corporation tax is down by a massive £6bn, and total Corporation Tax is down by £18bn overall, in part owing to the cuts in rates.Capital Gains Tax remains way below the £7.8bn it reached at the 18% rate in 2008-9, owing to the large increase in the rate.

When some of the main taxes in the country yield in excess of  £50bn less than forecast it is time to ask some questions about tax policy.

In a minority of cases – CGT and the top rate of Income tax – the rates are too high. Cutting the rates would increase revenues by increasing the number of rich people based here, and changing their behaviour to undertake more transactions and to receive more dividends and other remuneration.

In other cases like tax thresholds and fuel duty the revenue is lower thanks to tax cuts. Personally I support those cuts, but they do mean you have to spend less as a result, or find something else to tax.

The interesting question is Corporation Tax. The idea of lower rates should be attractive to companies looking for a place to invest. However, the rate cutting has clearly taken the rate below the optimum rate for maximising revenue. There is a feeling in the country that large multinationals should make a proper contribution to the UK as host country for part of their operations. The interesting question is how could this be done without deterring investment or driving them out of the country.

In yesterday’s press we learned that the Autumn Statement this week will include substantial extra sums for the NHS budget, and an enlarged roads programme.

This does not represent an increase compared to original plans for this year set out in the summer of 2010 by the new Coalition government, though it does represent a shift of priorities within the budget totals.

In June 2010 the government announced that it would increase total managed spending from the £669bn of the last Labour year to £737.5bn by 2014-15. Current spending would go up faster, at the expense of capital projects. Current spending was forecast to rise from Labour’s £600 bn to £693 bn by 2014-15.

In March of this year the Treasury published new forecasts for 2014-15 and beyond. They then estimated £680 bn for current spending, down on the 2010 forecast, with higher investment producing a total expenditure figure of £732 billion, down a little on the 2010 forecast.

These figures illustrate that the government has kept current spending under control as it wished to do, and has been able to increase capital spending whilst still keeping the totals below the original forecasts.

The higher deficit than planned is entirely down to weaker revenues, not to higher spending. Most people think spending has been cut heavily, though these figures(as I pointed out originally) meant some quite substantial cash increases in some areas, and allowed small real growth overall, with some departments nonetheless suffering cuts. In explaining the higher deficit, however, we need to explain deviations from the original plans. The adverse ones are all on the revenue side.

As I have explained throughout we are borrowing substantial sums in order to sustain further cash increases in public spending. This Autumn Statement is unlikely to bust the spending limits of 2010, and will allow more investment at the expense of current costs.

Yesterday I attended a seminar on harnessing science, great universities and new enterprise to promote growth.

The UK has several universities in the top ranks of world academic achievement. Oxford, Cambridge, Imperial London and other leading London establishments provide homes to some of the greatest world scientists and thinkers. However, if you compare our leading institutions with the Boston and Californian clusters of academic excellence which often top world tables we score less well when it comes to attracting private sector donations, harnessing venture capital and developing more new business on the back of the university achievements.

There is a growing interest in the idea of a golden triangle linking Oxford, Cambridge and London. There is also some success in all three main university locations in developing new business, attracting in new capital and encouraging more entrepreneurs. Oxford, Cambridge and London now have their own clusters of science and technology based businesses with good links and connections into the universities. Our success is one many other parts of the world would like to emulate, even if we are still behind the two best of the US on some of the qualifying results.

I trust the Autumn Statement will assist these important areas with improved transport links. They are developing critical mass for themselves in areas like nuclear, pharmaceutical and genetic developments. They can help generate the more interesting better paid jobs which a first world economy needs.