Mr Hammond wants to ensure the structural deficit – that is the deficit after adjusting for the estimated impact of any temporary weakness or strength in the economy – is no more than 2 % of national income in 2020 – 21 . That is a much easier target to hit than the previous aim of eliminating the deficit entirely by 2019 – 20 . Even so , previous experience suggests there is a more than one-in-three chance that he will miss even this looser target .
• Economic forecasts are subject to even more uncertainty than usual . Shaving just 1 % off growth over the period to 2020 – 21 could see the deficit rise by £ 7 billion .
• The official numbers include neither the promised increases to the income tax personal allowance and higher rate threshold , nor the apparently-inevitable failure to uprate fuel duties with inflation .
Between them they will cost more than £ 4 billion by 2020 – 21 .
Nearly three pounds in every ten spent by government goes on health , social care , and benefits to individuals with poor health or disabilities . A particular risk to the public finances may arise from pressure on health and social care spending .
• The five years from 2009 – 10 to 2014 – 15 saw the slowest growth rate in health spending since the mid-1950s when comparable data first became available , even though it continued growing as a share of public service spending due to the large cuts faced by other services . Department of Health spending is planned to grow at a similar rate over the five years from 2014 – 15 .
• Plans imply that growth in Department of Health spending in the decade between 2009 – 10 and 2019 – 20 will be slightly less than required just to keep pace with population growth and ageing – and that ignores significant other likely cost and demand pressures
• Adult social care spending has fallen by more than 6 % since 2009 – 10 while the population aged 65 and over has risen by nearly 16 %.
Spending per person seems likely to continue falling . Efforts to reduce spending on disability and incapacity benefits have delivered much lower savings than hoped . Government has now set itself an ambitious target to halve the gap in employment rates between the disabled and non-disabled populations .
• Spending on incapacity benefits in 2015 – 16 was £ 15 billion , 45 % higher than was forecast just three years before . Even so spending on incapacity benefits is a smaller share of national income than in any year since 1989 – 90 , largely because average awards have fallen from a quarter to a fifth of average male full-time earnings .
• In 2016 – 17 government will spend £ 24 billion – a quarter of non-pensioner benefit spending – on disability and incapacity benefits for working-age people .
• Incapacity benefits have become increasingly focussed on those with low levels of education rather than older people . Low-educated men aged 25 – 34 are now twice as likely to receive incapacity benefits as high-educated men aged 55 – 64 .
• Success in halving the ‘ disability employment gap ’ would be a truly remarkable achievement . It would require reducing non-employment among working-age disabled people by a third .
Oxford Economics , with whom we are again collaborating , forecast that UK GDP growth will be a relatively disappointing 1.6 % in 2017 and just 1.3 % in 2018 . The weaker outlook is largely driven by higher inflation , the bulk of which results from the recent sterling depreciation . Though prospects for wages are a little brighter , real earnings could rise by just 0.2 % in 2017 compared with 1.7 % in 2016 .
The four-year benefit squeeze also becomes more painful as inflation rises . On the plus side exports are likely to do better as a result of the
- 11 -