All aboard the fiscal rollercoaster?


We now have the final fiscal backdrop for the election, with the OBR setting out their forecast for tax receipts and the government’s tentative proposals for spending. Here we take a post-Budget look at what the parties’ deficit reduction targets might mean for the next parliament.

The graph below shows the fiscal stance of the main Westminster parties. It represents the possible path of consolidation under each, be that departmental cuts, welfare cuts or tax increases (or spending increases or tax cuts). Just to get the usual caveats in at the start, this will almost certainly be wrong for three reasons: the economic outlook will change, the parties’ plans will change, and our assumptions are only our best guess of the parties’ intentions. Nevertheless, it provides the best indication of the potential gap between the parties’ stances, as well as a sense of the trajectories of consolidation that may arise.


The first thing to note is that the Conservative plan has been significantly relaxed relative to the Autumn Statement position but is still one of sharp consolidation, particularly in the first half of the next parliament. In the Autumn Statement, the Chancellor chose an overall budget surplus of 1% for 2019-20. That has now been reduced to 0.3%, with spending increasing in line with GDP in 2019-20. Together with an interest rate windfall, which lessens the consolidation needed for all parties, this significantly changes the default outlook for 2019-20 (though this could change just as easily in the next fiscal statement).

The Liberal Democrats and Labour appear to require smaller consolidation. The Liberal Democrat goal is to balance the cyclically-adjusted current budget (CACB) in 2017-18 – which is in line with the fiscal mandate – and then to balance the overall budget excluding some but not all investment spending (this is uncertain but we assume half is excluded). Labour’s pledge is to deliver a current surplus by the end of the parliament at the very latest, but they have also signed up to the fiscal mandate which currently implies getting there in 2017-18. However, crucially this is based on a three year rolling period meaning that the target date will move outwards over the course of the parliament.

A noticeable feature of almost all of these trajectories is their ‘rollercoaster’ profile, whereby consolidation is introduced and then effectively reversed as spending begins to rise again (‘bust and mini-boom’ as we called it, or ‘famine followed by feast’ as Robert Peston said). This was almost certainly always going to be the case – real departmental spending would not keep falling forever while the economy grows (though the consolidation rollercoaster could equally be about tax or welfare changes). But the ‘turning point’ – or light at the end of the tunnel – is now visible within the forecast period for all the major parties, including the Conservatives whose rollercoaster is the largest. We discussed some of the trade-offs involved in this approach earlier this year.

In the case of the Liberal Democrats (and given our assumptions of their policy details), £17 billion of consolidation in the three years to 2018-19 would then be almost precisely reversed in 2019-20 – but with debt lower than if the trajectory had been flat.

For Labour, the small improvement in the underlying fiscal forecast means that by 2019-20, spending could be slightly increased (or taxes cut) compared to 2015-16 while still meeting their budget target (note that this is on top of the OBR’s forecast increases in some areas of non-departmental spending such as pensions, and on top of any funded spending/tax changes). Yet this £10 billion available is very modest – around a 0.7 per cent annual increase in departmental spending for example (lower than the growth of the economy as a whole). This compares to the 0.5 per cent annual increases the SNP had suggested, before the OBR’s forecast changes.

But there is a key political and economic choice: whether to take a straight trajectory to that 2019-20 point, with no real terms spending cuts or tax increases in any year, or to consolidate earlier – such as to meet the fiscal mandate in 2017-18 – and then start increasing spending in line with GDP earlier (or cutting taxes or building a larger surplus).

So the key message post-Budget but pre-election remains that there are big differences between the parties, with a gap of over £30 billion by 2019-20 between the potential Conservative and Labour positions and the possibility of even larger differences en route to that point.

Yet there remains a serious candour deficit about how any of these plans will be realised. The Chancellor referred briefly in the Budget to making £13 billion of departmental cuts, £12 billion of welfare cuts, and £5 billion of savings from tackling tax avoidance – just short of the £35 billion we calculate they’d need by 2018-19. But given the scale of these figures, particularly while simultaneously protecting some departments and areas of welfare spending and promising tax cuts, more detail is surely needed. The Liberal Democrats had suggested they would use up to £12 billion of departmental cuts, £4 billion of welfare cuts, at least £8 billion of tax increases and £6 billion from new measures against tax avoidance; though post-Budget (and post their spring conference) this may have changed. Labour haven’t yet fully clarified their deficit position or – just as importantly – their desired tax and spending mix.

All the parties also need serious plans to ensure productivity increases, and with it the underlying strength of the economy. As we set out earlier this week, the difference between closing some of the productivity gap and continuing stagnation in output per hour could have an ever larger impact on the public finances than the gaps between the parties. We’ve seen how some figures have changed between December and March: the range of possible economic outcomes between now and 2019-20 is far greater, and not entirely out of the parties’ hands.