Green Budget: no let-up in austerity UK

Pen and calculator 1 February 2012

The financial crisis and recession has revealed "a £114 billion hole in the public finances", states researchers at the Institute for Fiscal Studies (IFS) at the launch of the Green Budget, their annual analysis of the UK economy. This year’s Green Budget is supported by the ESRC and produced in collaboration with Oxford Economics.

The report also predicts that the Government will borrow less than predicted in 2011-12 (£2.9 billion), with departments underspending by more than £3 billion this year. Provided the economy follows expectations, public borrowing could be £9 billion lower in 2016-17 than the official forecast.

But there are several risks to this estimate, the biggest being a breakup of the Eurozone or a slowdown in the UK economy, leaving little scope for a significant permanent giveaway in the Budget. A Eurozone crisis could push the UK back into deep recession, with GDP falling both this year and next.

Local government spending - excluding education - have been hit by cutbacks, and are on course to fall by around 10 per cent between 2009-10 and 2011-12. But the cuts are larger in urban and poorer parts of England (London and Northern England), while more affluent and suburban regions are less affected.

There is a stronger case for a short term fiscal stimulus to boost the economy than a year ago, since the risk for a monetary tightening is reduced in the current climate. But a modest stimulus will only generate a modest boost, while a larger stimulus could risk undermining investor confidence, according to the researchers.

An ageing UK population will increase the pressure on health and pension spending over the next years, with costs unlikely to be met by current tax income. "Even once the immediate fiscal repair job is done, further hard choices over tax and spending are likely to be needed," warns the report.

"As the Chancellor prepares for the Spring Budget and the economy is being debated at all levels of our society, it is important to ensure that rigorous and independent academic analysis is undertaken on the UK economy," comments Professor Paul Boyle, ESRC Chief Executive.

"In forecasting the UK economy we need to consider and evaluate the contributions of current fiscal strategies and look to develop new approaches for growth. It is for this reason the Economic and Social Research Council supports the launch of the IFS Green Budget forecast."