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Day-to-day public services will bear the brunt of swingeing spending cuts as the government returns Britain to its first budget surplus for 18 years, according to analysis by the Office for Budget Responsibility.
The prospect of higher welfare spending and more government outlays to cover interest payments on its debt means that if the budget is to be balanced as planned by 2018-19, the onus is likely to fall on public sector pay and procurement, said the OBR, which was set up to provide independent forecasts to the government.
"Given our latest economic forecast and the government's current policy settings, the public finances appear on track to return to balance by 2018-19. This would deliver the first budget surplus for 18 years and would represent one of the largest deficit reductions among advanced economies in the post-war period," the OBR said, summarising its new paper Crisis and Consolidation in the Public Finances.
"The crisis and consolidation would leave the total levels of spending and receipts at roughly 38% of GDP, much the same as they were when the budget was last close to balance in the early 2000s.
"But this would mask a large change in the composition of spending, with spending significantly higher as a proportion of GDP for welfare, debt interest and other annually managed expenditure, and lower for capital spending and – much more so – day-to-day spending on public services," it added.
The hit to day-to-day spending would come as revenues grow only slightly as a proportion of GDP because most of the government's tax increases will be used to pay for other tax cuts and to cover the loss of tax receipts from areas like the slimmed down financial sector and the North Sea.
On current coalition plans to get the budget back into surplus, per capita spending on public services would be cut by almost a quarter, or 23%, between 2007-08 and 2018-19, once adjusted for inflation, the OBR predicts.
"This would reduce spending on public services and administration probably to its lowest share of GDP at least since 1948 – and on some data the lowest since 1938," the OBR said, adding that in absolute terms, however, public services spending would be much higher in 2018-19 than it was in 1948.
The OBR chairman, Robert Chote, noted that these forecasts were liable to change under the next government given the two member parties of the coalition have already said that they would follow different policies if each was to govern alone while Labour has said it will balance the books but the timing will depend largely on the state of the economy.
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