IFS Green Budget 2017

The IFS launches its latest Green Budget with its annual analysis of the state of the economy and the public finances

The IFS launched its Green Budget on 7 February 2017 with its analysis of the economy and the public finances and a number of specific tax and public finance topics. The publication takes place four weeks before the actual Budget on 8 March.

The full Green Budget, or the individual chapters, can be downloaded from the IFS Green Budget 2017 content page. 

This is the third year that ICAEW has been involved with IFS in the Green Budget as a sponsor and this year ICAEW provided two chapters, one covering Whole of Government Accounts and the other debt funding. See Michael Izza’s blog on the two chapters.

In his Preface, Paul Johnson Director of IFS, emphasises the enormous uncertainty surrounding all the main elements in the Green Budget: 

“the challenges facing a Chancellor seeking to eliminate the deficit in the next Parliament, whilst facing unprecedented levels of economic uncertainty and risks on both tax and spending.” 

One headline is that the tax burden is likely to rise to its highest level since the mid 1980s with higher tax on dividend income, an increase in tax on insurance premiums, higher vehicle excise duty and a restriction on pension contributions for those on very high incomes.

There is now no fiscal target during the current parliament and the main target in the next parliament will be to return the public finances to balance as soon as possible as long as the economy is not too weak. In practice the UK has only had a surplus in eight years over the past 60 years.

The economy

Oxford Economics, which partnered with IFS in producing the Green Budget, noted that growth had held up well in 2016, 2%, despite the Brexit vote and the main contributor had been consumer spending. But inflation will harm consumer confidence in the future and the forecast for growth in 2017 to 2021 is only 1.5% a year.

The public finances

The make up of spending is going to change over the next few years with more capital expenditure, for instance on transport, and more in protected departments such as health, pensions and overseas while spending on schools, defence and, in particular, public order and safety will be lower.

UK health and social care spending

There is a separate chapter which seeks to understand what is going on when health is a protected department but our news media are full of stories of crisis in the national health service. The simple answer is that it is very complicated and one conclusion of the report is that:

“The extra NHS spending is enough to compensate the NHS for pressure created by a growing and ageing population over the next few years, but it does not account for other cost and demand pressure.”

Social care is under perhaps even greater strain which has a knock on effect on the NHS and capacity in hospitals and over the past six years spending on adult social care fell by 6.4% while the population aged 65 or over grew by nearly 16%. The pressure on local councils to raise council tax, or cut services to maintain social care, are likely to become more acute in the next few years.

Working-age incapacity and disability benefits

Seventeen percent of working age people are disabled. Just over half of these people are not in paid work and  receive disability or incapacity benefits. These benefits cost £24bn. This compares with 81% of the non-disabled working age people who are in employment. The gap is much greater for the low educated where 43% who are disabled are in employment compared with 85% who are not disabled. The relative figures for the high educated are 67 and 89%.

Tax, legal form and the gig economy

The ‘gig’ economy is defined in the Green Budget as individuals who are performing work that can be broken down into separate tasks (‘gigs’) and using a digital platform operated by a large company to match the individuals to customers. Matthew Taylor is carrying out a Review into Employment Practices in the Modern Economy and is due to report later this year. At the moment there is not a great deal of specific data about the ‘gig’ economy but the individuals involved pay less NIC contributions than their reduced benefit entitlement to the tune of £5.1bn. IFS has some suggestions as to how the income tax and NIC burden could be distributed more equitably but we are not sure that this provides a practical solution. This will be a continuing concern to policy makers and ICAEW intends to participate fully in the debate.

Public sector liabilities in the Whole of Government (WAG) Accounts plus the National Debt

These two chapters are written by ICAEW. WAG apply normal accounting standards to the public sector and in particular accrue for liabilities such as unfunded pension liabilities, nuclear decommissioning and clinical negligence claims. Total liabilities were £3.5tn at 31 March 2015 which is more than two and a half times the narrower measure of public sector net debt in the national accounts.

The second ICAEW chapter covers National Debt. This now stands at more than £1.6tn and is much longer dated than the debt of any comparable countries, 18 years compared with less than 6 years for the United States. This has allowed the UK to lock in to low interest rates and match maturities with the long term nature of a lot of public sector liabilities.

Reforms to apprenticeship funding in England

Better skills training is going to be of fundamental importance if the UK is going to improve its productivity and its growth potential so it is disappointing, as the IFS concludes, that the proposed new apprenticeship levy is not better designed.

“We need to move away from arbitrary targets and across-the-board 100% funding to a more gradual expansion, a stronger focus on quality, and a policy designed to maximise impact rather than numbers.”