The incredible shrinking capital budget

Ben Chu

Remember the £5bn boost to capital spending (capex) over the next two financial years leaked by the Government last Tuesday in advance of the Autumn Statement? This was to go on new schools, roads, rail etc to help get the economy moving.

And it was to be paid for by squeezing current spending by departments.

Here’s how George Osborne described the move in the Commons:

“We go on equipping Britain to succeed in the global race by switching from current spending to capital investment in science, roads and education.”

Well, the Institute for Fiscal Studies noted last week that the Office for Budget Responsibility’s own calculations show that the capex boost over the next two years will actually be closer to £2bn.

Why? Because, as I noted last week, the OBR thinks departments will not spend their full budgets over the next two years. And this includes their capex budgets. This is from the latest OBR document:

OBR undespend1 The incredible shrinking capital budgetIn the red box you can see the Autumn Statement extra capital money (labelled “PSGI” or Public Sector Gross Investment): £2.2bn in 2013-14 and £2.9bn in 2014-15.

But observe “underspend assumptions” in the lines above. The OBR thinks departments will underspend their capital budgets in both 2013-14 and 2014-15 by £1.5bn, thus effectively cancelling out 60% of the Chancellor’s stimulus.

Does this mean the OBR thinks only 40% of all the new projects unveiled last week will actually get built? I’ve spoken to the OBR and they say their underspend assumption is about aggregate capex budgets across departments (£34.3bn in 2013-14 and £35.1bn 2014-15) and that they are not taking a view on the likelihood of individual projects being completed.

But the point remains that the Chancellor’s watchdog is assuming that the impact of his spending switch will be less than half of what last week’s headlines suggested.

The OBR said last week that it thinks the total impact of the Autumn Statement measures on the economy will be small increase in output of just 0.1 percentage points in each of the next two years.

But it would be bigger if the Chancellor forced departments to spend their full capex budget.

Using the OBR’s multiplier of 1 for capex (which may well be too low) means that what would have been a £5.1bn (0.34% of GDP) boost to output over the next two years, is now only £2.1bn (0.14% of GDP).

Small potatoes in either case one might reasonably point out (Jonathan Portes of NIESR wants a £30bn capex boost). But that’s hardly an argument the Treasury can use, having made the spending switch one of the central items of the Autumn Statement.

So why doesn’t the Chancellor simply announce that he will force departments to get all their money earmarked for capital spending out of the door? Perhaps because that would stop him making his dubious boast that the deficit is set to fall in cash terms this financial year since, in an exquisite irony, this only happens because the OBR has factored in assumptions of hefty department underspends.

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  • andyholmes

    This is spin at 78 rpm.

    As the OBR pointed out, that underspend is assumed on the total budget. This means that even without the additional allocation those departments would underspend by that amount. Therefore the £5bn boost is just that.

    Falsely asserting that the underspend would only happen as a result of the increase is typically flawed analysis and spin.

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