David Cameron and Ed Miliband make speeches today on growth. New analysis shows that last week's Spending Review will remove around £60 billion from the economy.
Both David Cameron and Ed Miliband make speeches today on growth to the Confederation of British Industry. The impact of any pro-growth policies will, at best, offset the negative impact on growth of the spending review which is set to impact 490,000 public sector jobs and a further 200,000 in business and financial services. Analysis from Left Foot Forward shows that last week’s Spending Review will remove around £60 billion from the economy.
Last week the Institute for Fiscal Studies broke the Government’s plans down into tax rises, public service cuts, capital investment cuts, and welfare cuts. By plugging in multipliers prepared by the independent Office of Budget Responsibility, it is possible to show that the Coalition’s spending plans will take £59 billion from growth. By comparison Alan Johnson’s plan, which stuck to the timetable set out by Alistair Darling but put a greater emphasis on tax, would have impacted growth by the lower figure of £34bn.
The October Spending Review – which announced a greater focus than George Osborne’s June Budget on welfare cuts to reduce the impact of cuts on public services and investment – mitigated the impact of cuts by only £2bn. By contrast, Alan Johnson’s new approach reduced the impact on growth from £40bn in Alistair Darling’s plan to £34bn.
The figures on public service cuts clearly contradict George Osborne’s claim that:
“And because of our tough but fair decisions to reform welfare, and the savings we’ve made on debt interest…
“… I am pleased to tell the House it has been possible – and the average saving in departmental budgets will be lower than the previous Government implied in its March Budget.”
Alistair Darling mooted £44 billion of cuts to public services and capital investment compared to George Osborne’s £53 billion. Alan Johnson reduced Labour’s number to £34 billion.
52 Responses to “Spending review slashes £60bn from growth”
Michael Burke
Will, it’s even worse than that. The OBR has the same multipliers as the National Audit Office, except for capital investment which the NAO puts at 1.4 and the OBR reduces to 1. This is not supported by the literature cited by the OBR in the June 2010 Budget.
This would make the Darling plans £6.9bn worse in reality, the Johnson plan £3.9bn worse, the Osborne (Oct) £6.8bn worse and the CSR £7.7bn worse.
On all the multipliers, the overwhelming bulk of the literature suggests they are much higher when the output gap is high, as now.
Crucially, and this point is often ignored or overlooked, the negative effects from a one-off fiscal contraction can persist over many years. Both these OBR and NAO estimates are first-year effects only.
@ 1. The existence of multipliers is precisely an attempt to gauge the effect on the private sector- the public sector isn’t mutiplying itself.
Will Straw
Families Against National Debt – I owe you a response from your previous comment so let me kill two birds with one stone. Your caveat is the right one. There is no empirical evidence that a more rapid fiscal consolidation will make the private sector behave differently. Ricardian Equivalence, if it exists at all, is a long-term phenomenon and we are dealing with the short term pain of unemployment and falling living standards. Indeed, precisely because of the multiplier effect, a rapid retrenchment is likely to depress the private sector. The PwC analysis mentioned in the Will Hutton piece I linked to indicates this point.
Michael – Thanks for flagging this. As before, I chose the OBR multipliers since Tories are unable to shoot the messenger when I do so. In previous posts, I’ve linked to your previous comments to outline the problems with using them. I should have done the same in this post.
All the best,
Will
Wendy Maddox
RT @leftfootfwd: Spending review slashes £60bn from growth http://bit.ly/aMVJrI
Ash
Will –
I’m confused about certain figures that don’t show up here.
Most importantly: if the economy would grow by an additional £25bn under the Johnson plan, what contribution to deficit reduction does that make? (How much does the tax take go up? How much does the welfare bill go down?)
It’s not as if you can work out how much a plan would cut the deficit by, *then* work out how much the economy would grow under that plan (as if that’s a separate question); surely you need to work out how much the economy would grow under a plan in order to arrive at a figure for the amount of deficit reduction it achieves?
(This seems important, because every £1bn of deficit reduction achieved through growth is £1bn of cuts and/or tax rises you don’t need to make; that’s the essence of a ‘growth vs cuts’ narrative.)
The other missing figures: is Labour actually opposed to the Government’s restriction of pension tax breaks (£4bn) or action on tax avoidance & evasion (£7bn)? That seems awkward, to say the least.
Sunder Katwala
RT @leftfootfwd: OBR figures shows that Spending Review slashes £60bn from growth http://bit.ly/cpHSG4