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
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