The chancellor did more to boost public spending in the Budget than many had expected, not least because it was well known that he was reluctant to ease up on the fiscal constraints of the last few years. The Budget did indeed include tax cuts and spending increases, even if it did not quite live up to the prime minister’s declaration in her party conference speech that “austerity is over”.
However, the political danger for the government is clear – as Labour has noticed. Even though Philip Hammond’s decisions in the Budget have marked a real change of direction, so much of the extra money is going to the NHS that there is little left over for anything else. People may not feel much difference in other public services, or that their lives have become easier.
More seriously, the Budget did not address the longer-term implications of an ageing population for the cost of public services and pensions. Even if public finances are improving now, the deficit will gape wider over the coming decades. It is impossible to sustain the level of public services we have now with anything close to the tax revenues the UK has been accustomed to raising. Labour seems to be in denial on this point, too.
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The chancellor made full use of the £13bn windfall that the Office for Budget Responsibility handed him almost on the eve of the Budget, when it revised its borrowing forecasts to reflect higher than expected tax receipts. Essentially, the chancellor used this, together with a package of tax raising measures in the Budget, to pay for the hike in NHS spending. The tax rises also supported the easing of spending controls on other fronts, such as reversing some of the cuts made previously to work allowances in Universal Credit.
But it was striking that growth projections were so dull, fluctuating between just 1.4% and 1.6% from 2019 to 2023. The UK has gone rapidly from around the top of the G7 countries in terms of annual growth to the bottom, partly because of uncertainty around Brexit. There is no rescue offered here for the fiscal squeeze that is coming as an ageing population pushes up the cost of public services.
The costs of healthcare are rising in any case, and the ageing of the population will push up the number of people needing extensive medical or social care. According to the Office for National Statistics, one in four people resident in the UK will be over 65 within 19 years. That will increase the cost of providing state pensions too. The OBR has projected that any government would need to increase annual spending on health, social care and pensions by 1.7% of national income over the next 10 years simply to maintain the level of services offered now.
Yet tax revenues are expected to fall by 0.2% of national income over the same period. Some taxes such as fuel duty and tobacco and alcohol taxes are declining as a proportion of the whole – for healthy reasons, such as a change in behaviour. The trend towards self employment has also made it harder for government to collect taxes from work.
It has been clear for some time than any government faces a difficult choice. It either needs to raise taxes – and not only is this unpopular, it can also prove very hard to do – or it needs to pare back the range of services offered to the public. In that case, it needs to begin telling the public that their expectations are not supported by the revenues the country is capable of raising.
Labour shows no more sense of reality about this, talking about using the current improvement in the deficit to spend more on services, while ignoring the looming predicament just a few years away.
Austerity may be easing for now. But the inconvenient truth is that there is more of it to come in the next couple of decades.