Nicola Sturgeon gave a widely trailed speech in London earlier this week majoring on the SNP’s opposition to what she said was a ‘cosy consensus’ in Westminster on austerity. In providing a few new bits of information on the SNP’s view on public spending it helped fit another piece in the jigsaw that is the political parties’ emerging fiscal stances.
In years gone by the SNP’s view of the fiscal stance the UK government should take would probably not have received much attention from the London media. No longer. Sturgeon’s party are vying to be the third largest Westminster party in what looks destined to be another hung parliament. Like all the other main UK parties, their views deserve careful scrutiny.
The first minister’s headline was that she favours £180 billion of extra spending in the next parliament relative to current coalition plans. That sounds like an awful lot of money – and indeed a number of commentators immediately took the view, suggested by Sturgeon, that it puts the SNP in a completely different fiscal universe to any other mainstream party. Are they right?
Sturgeon argued that the £180 billion arises out of an increase in ‘departmental spending’ of 0.5 per cent a year in real terms over four years, implying that the SNP would commit to delivering existing 2015-16 plans, as each of the Westminster parties have, before changing course. Our estimates suggest that raising departmental spending by 0.5 per cent in each of the four years after 2015-16 would indeed yield a cumulative increase in spending of around £180 billion (in 2019-20 prices, £160bn in today’s) compared to existing coalition plans. So that seems to fit.
Another, more conventional, way of putting this is that in the final year of the next parliament, departmental spending would be around £60 billion higher in the SNP scenario than it would be under the coalition’s outline plans. This means that departmental spending would end up in roughly the same place in 2019-20 (in real terms) as it is now. We’d see £8 billion or so of departmental cuts in 2015-16 broadly cancelled out by a rise of around £7 billion across the following four years. It also means that, all else equal, there would still be a (small) UK-wide current deficit come the 2020 election.
The chart below is an attempt to capture different possible paths for departmental spending over the parliament building on our last fiscal briefing. It’s based on current information and we’ll update if new information is provided. Of course, in considering these different trajectories we also need to bear in mind that the flipside of higher spending, all else equal, would be higher debt and higher debt interest payments.
In all scenarios there is a fall in real-terms spending in 2015-16, reflecting the allocations laid out in Spending Review 2013. Our indicative SNP (yellow) line sets out a subsequent trajectory of annual increases of 0.5 per cent. It is in stark contrast to the blue line, which shows the sharp decline in departmental spending associated with the coalition’s plan for a current budget surplus of £46 billion in 2019-20 (assuming no changes to tax or welfare cuts – the standard OBR assumption).
So how does the SNP proposal compare to Labour’s position? The answer to that, obviously, depends on the year in which Labour reaches current balance. The chart presents two red lines – one (dotted) showing what happens if the current budget is balanced in 2017-18, which is in line with the Charter for Budget Responsibility that Labour recently signed up to. The other flatter (solid) red line represents the path if current balance is only achieved in 2019-20 (the latest date Labour can hit current balance by under their usual formulation of their fiscal stance).
Sturgeon’s argument that there is a major difference between the two parties rests on the assumption that Labour is now firmly committed to balance in 2017-18. And it’s certainly true the dotted red line would imply a big difference with the SNP, particularly in the first half of the next parliament. Though even in this scenario we should note that come 2019-20 there would still be a £48 billion gap between Labour and the coalition plans; not that far short of the £60 billion gap that would exist between the SNP and the coalition.
But as we’ve set out elsewhere the ‘Charter for Budget Responsibility’ is highly elastic: it’s not based on a firm commitment to reach balance in 2017-18. Instead it represents a rolling ‘aim’ of planning to reach current balance three years down the road. Most economists are sceptical about how much difference it will make.
So what if Labour targets a current balance in 2019-20 instead? Based on current OBR assumptions this could be achieved with as little as £7 billion of fiscal consolidation in the four years to 2019-20 (including the cost of extra debt interest). Or, to use more eye-catching ‘cumulative’ figures, as Sturgeon did, this would in theory be consistent with spending roughly £140 billion more than coalition plans.
Perhaps a more useful way to think about what the Labour/SNP difference in this scenario might amount to is to consider the implications for annual departmental budgets. The SNP proposal implies increases in total departmental spending of £1-2 billion per year over 4 years; whereas Labour’s 2019-20 scenario implies cuts of £1-2 billion per year over the same period. This is against total departmental spending of around £350 billion. Another way of putting this is that the SNP have said they would increase departmental spending by roughly 0.5% pa whereas Labour would reduce it by roughly 0.5% pa. By 2019-20 this difference adds up to roughly a £14 billion gap between the two parties. Now, that’s a real difference but given the scale of the numbers involved, (and the fact that some of Labour’s consolidation may come from tax increases rather than spending cuts), it’s also a fairly modest one.
Indeed, it’s questionable whether it is meaningful to be placing much significance on planned differences of a few billion pounds a year between any of the parties come the end of the next parliament. Fiscal discussions of this type tend to suffer from a severe case of false precision. None of the party leaders knows any better than you or I what will happen to productivity next year, never mind in 2020. Yet any difference between, say, the Labour and SNP spending plans would be dwarfed by the fiscal implications of even modest boosts (or dips) in productivity. Indeed, even the very large difference between the SNP (or Labour) and the coalition’s plans could be overshadowed by a significant shift in productivity trends. And, to Sturgeon’s credit, her remarks this week emphasised productivity.
The difference between the SNP and Labour could therefore be relatively large, or fairly modest, depending on the date at which Labour targets current balance which still remains unclear. And, crucially, all these figures are subject to huge uncertainty. Which isn’t to say that we shouldn’t carefully scrutinise the apparent differences and similarities between the parties’ fiscal commitments as they emerge. We’ll do just that. It’s just that when we do, we should always bear in mind how easy it would be for all these plans to be blown far off course.