Next term we’ll learn about the difference between fiscal plans, and fiscal outturns, or outcomes. Fiscal plans are the ones set out today by the Chancellor in his Autumn Statement. Fiscal outturns are what we’ll see over the next four years.
Probably the most spectacular differences between plans and outcomes come when recessions come unexpectedly, like with the 2008 financial crisis which put paid to Gordon Brown’s Golden Rule (not borrowing for current consumption over the “cycle”). The outcomes, as we all know, were very large deficits, up to 10% of GDP.
What is perhaps most striking is that for all the anticipation of where the cuts would fall, instead the news is all about what cuts didn’t happen: tax credit cuts cancelled, police, international development, healthcare and defence budgets all protected, with a list of additional goodies thrown in.
How was all this possible? Without resorting to cynicism about politicians dressing up the good news and hiding the bad news (hint: local government and various tax rises hidden in the small print), this Guardian analysis makes it clear what changed: an upward adjustment in forecasts for growth and hence tax receipts.
The idea is this: as the independent Office for Budget Responsibility provided a very positive forecast for growth and hence tax receipts (we pay more tax when we earn more and spend more), this meant that in order to keep to his fiscal plans to eliminate the deficit, Osborne had to do much less – growth would do the hard work for him.
But the main point is this: all of this is based on economic forecasts, rather than actual events – it’s plans, not outcomes. We have to wait until 2020 to see what the outcomes are like. It shows just how hugely important economic forecasts are, however – and why you should think about taking my forecasting module when you get to your third year 🙂
It’s a curious aspect of the political climate that at the same time that huge amounts of cuts need to happen (including to infrastructure investment since the Fiscal Charter doesn’t exempt that), still the headline is about a pledge to spend more on housing.
In addition, there’ll apparently be £3.8bn more for the NHS, and more on defence given the recent crises, while schools and international development can’t be touched. Which leaves a lot of cuts to fall in other areas. The BBC states that “These include local government, the Ministry of Justice and the Home Office, with police forces expected to face more cost-cutting.” Which will surely lead to protests by police officers – perhaps exemplifying why it is incredibly difficult to cut government spending…
We’ll come back to this in fiscal policy later in the Autumn Term…
Reminders: Lunchtime, 1-2pm in HumSS 125 is the latest Economics Conversation, where today we’ll be discussing the upcoming Financial Settlement and Autumn Statement by the UK Government. These are both statements likely to be all the more interesting in light of recent events surrounding tax credits and the government’s fiscal charter.
Also, at 4pm today in Palmer 104 we have Lord Kerslake, former Head of the Civil Service, speaking at our Policy in Practice seminar. This is an event open to all, and a really great opportunity to hear more about how government works, particularly when it comes to the role economics plays (or doesn’t) in the policy-making process.
On Monday we turn our attentions at our Economics Conversations sessions to the UK and its government’s fiscal plans. On November 25 the Spending Review and the Autumn Statement will happen.
The Spending Review happens at the start of each Parliament, hence the last one was back in 2010, and it sets out the budgets for each department, or part of the government.
The Autumn Statement is the Autumn counterpart to the Budget, which happens each March, and hence is an annual event where the Chancellor updates plans for government taxation and spending.
There’s little doubt that as we get nearer to these events, they’ll get more and more media attention, not least after the tax credits fiasco, so it’s always good to be prepared to think about them as economists by discussing them, as economists.
See you all on Monday!