UK required public spending cut still huge
Simon Ward
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The Office for Budget Responsibility’s forecast that the public sector deficit will be eliminated in 2018-19 depends on the share of current public spending in GDP dropping by a whopping 5.2 percentage points over the next five years. The spending share has retreated from a post-war record 42.4% in 2009-10 and 2010-11 but remains historically high, at a projected 40.8% this year – see chart.
A reduction on the required scale occurred in the late 1980s but was achieved with the aid of strong economic growth – GDP rose by an annual average 4.3% in the five years to 1989 in real terms and by 9.9% in nominal terms. The OBR projects growth of only 2.5% and 4.3% respectively over the next five years.
Sceptics argue that a spending overshoot will necessitate further tax increases after the 2015 election. Excluding oil revenues, however, the tax share of GDP is already projected to rise to the top of its range in recent decades – see chart. The share has been significantly higher in only two years in the post-war period – 1969-70 and 1970-71. Labour Chancellor Roy Jenkins imposed a vicious fiscal squeeze following the 1967 sterling devaluation, probably losing the party the 1970 election. Increased international mobility of capital and labour casts doubt on whether a future Chancellor could achieve a similar tax grab.
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