Over £20bn of fiscal tightening needed from 2016 to meet coalition fiscal target

Press release from the Resolution Foundation

Wednesday 3 December – For immediate release

OVER £20BN OF FISCAL TIGHTENING NEEDED FROM 2016 TO MEET COALITION FISCAL TARGET

Resolution Foundation calls on parties to set out what their fiscal plans mean for taxation, welfare spending and the future shape of public services

Deeper spending cuts, tax rises or a combination of the two will be needed to find the £22bn worth fiscal tightening in the two years from 2016 – on top of around £8bn in departmental spending cuts already pencilled in for 2015-16 – in order to reach the expected coalition target of an adjusted current balanced budget by 2017-18, the Resolution Foundation says in response to the Autumn Statement and latest OBR forecast.

The Resolution Foundation has used the latest OBR projections to update its recent analysis on the fiscal choices facing the next government. It finds that, on top of the £8bn of departmental cuts due in 2015-16 (which all parties are expected to deliver);

• The Conservatives and Lib Dems’ prospective shared short-term target of a current balanced budget in 2017-18 will require a total fiscal consolidation of £22bn in the two years from 2016.
• Delivering the £21bn overall budget surplus by the end of the parliament that today’s OBR figures set out would imply additional fiscal tightening in the four years from 2016-17 of around £47bn.
• By excluding the £25bn-£30bn capital budget from their fiscal target, Labour would require considerably less fiscal tightening than today’s figures imply, with the precise figures depending on when they chose to target balance. They would, however, also have a higher stock of debt than under the government’s plans.

The Resolution Foundation believes it is now even more important for parties to address the ‘candour deficit’ and provide more detail on the difficult decisions they must make to meet their deficit reduction targets in the next parliament.

The Resolution Foundation believes that the decision to erode work incentives by freezing Work Allowances in Universal Credit was the wrong choice, particularly as the government has found the resources to increase the personal allowance next year (and increased the higher rate threshold in line with this). RF analysis shows that over three-quarters of the gains from this go to the top half of the income distribution.

Following the disappointing performance of pay this year, the OBR predicts a modest improvement in wage growth in 2015 (a sharp scaling down of their forecast in March).  But there is a long way to go for wages to return to pre-recession levels – under the OBR’s projections for average earnings the first full year this will happen is 2018 (using CPI).

Resolution Foundation analysis of the latest OBR figures show that median earnings are set to rise to £440 (in 2014 prices) by 2019, still short of their pre-downturn peak and equivalent to earnings in 2003 (based on CPI). Using its own RPI-J forecast, the Resolution Foundation expects the weekly wages of a typical worker to increase by £6 by 2019 – equivalent to earnings in 2000. On this basis, it will be well into the next decade before the earnings of a typical worker return to their pre-downturn peak.

Matthew Whittaker, Senior Economist at the Resolution Foundation, said:

“Today’s forecasts show a worrying decoupling of economic growth from tax revenues. All parties will be concerned that strong employment growth hasn’t fed through into healthier receipts. This raises further questions around the merits of the tax cuts promised by all parties in the next parliament.

“Some of the measures announced were disappointing, others are to be welcomed. The latest rise in the personal allowance comes at a cost of £530m and the main beneficiaries from this will overwhelmingly be better off households. Meanwhile the work allowances in Universal Credit, which are vital to whether or not it pays to work, have once again been frozen.”

“Far more welcome is the sweeping reform to Stamp Duty and the introduction of postgraduate loans – measures that are of long term significance”.

“Even if wages finally start rising in real terms next year the typical worker is very unlikely to return to their pre-crisis wage level any time this decade”.

“The recent shortfall in tax revenues has created a fiscal headache for the Chancellor, but they have made the deficit reduction plans of every party harder. With the election approaching it becomes ever-more important for the parties to open up to voters about just how much more fiscal pain there may be to come after the election.”

Distribution of gains across households from increasing the personal allowance to £10,600 and the higher rate threshold to £42,385 in 2015-16

• The Resolution Foundation median wage projection is based on the OBR forecast for mean weekly earnings. We convert to the median by applying to the OBR’s figures the historic ratio (1997-2007) between average annual growth in mean and median weekly wages as recorded in the ONS Annual Survey of Hours and Earnings.
• The Resolution Foundation report on the distributional gains from the main parties income tax policies is available at resolutionfoundation.org/publications/missing-the-target-tax-cuts-and-low-to-middle-income-britain/

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For more information contact:

Rob Holdsworth (Director of Communications) on 020 3372 2959 or 07921 236 972

Natalie Cox (Communications Officer) on 020 3372 2955 or 07983 550 337