Sunday, November 30, 2014
Osborne confronts his failure on the deficit
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The autumn statement, George Osborne’s fifth and possibly final one, is on Wednesday and it is hard not to feel a sense of déjà vu. I have previewed very many of these over the years, and I can count on the fingers of one hand the times when I have expected a chancellor to stand up and announce that the budget deficit is coming in lower than he expected.

On Wednesday, the chancellor will do the opposite, as is often the case, and confront his failure. This year the budget deficit will be close to £100bn, with the independent Office for Budget Responsibility (OBR) set to revise up the prediction it made in March by around £10bn. It is touch and go whether the deficit will be up or down this year compared with last. It was, of course, supposed to fall, by 12% or nearly £12bn.

So it will be another miss, and an even bigger one compared with Osborne’s original June 2010 plan. The definitions have changed, making precise comparisons more difficult, but this year the deficit was supposed to be below £40bn, with all the hard work of deficit reduction completed ahead of the election. At £100bn, there is another parliament’s work to be done, if politicians and voters have the appetite for it.

Osborne’s deficit failure is not, as I say, untypical. We have had autumn statements since 1976, though there was a time under the Tories in the 1990s when they were known as single unified budgets (the March budget was scrapped) and Gordon Brown called them pre-budget reports. ‘Chancellor to miss borrowing targets’ is usually a pretty safe headline for these events.

It matters more now though, and not only because the deficit is still so big. Deficit reduction was central to the coalition government’s programme; its main purpose. It has not been achieved. Theresa May, the home secretary, admitted the other day that David Cameron’s target of reducing net migration to the high tens of thousands would not be met, by a mile.

The autumn statement will confirm that for the budget deficit. Both the things Ed Miliband forgot to mention in a party conference speech widely regarded as a disaster – immigration and the deficit – are not going well for the government. Yet stewardship of the economy, if not Britain’s borders, will be central to the Conservative May 2015 election campaign. Can it possibly work when the deficit is still £100bn?

Osborne has a good story to tell on growth, jobs and inflation. The recovery in real wages is late in the day but it will help. Depending on what the OBR says about the amount of spare capacity in the economy, he might be able to claim that the underlying, or structural budget deficit, has been brought down to Labour’s pre-crisis figure, as a percentage of gross domestic product.

That is true on the International Monetary Fund’s estimates, which suggest that Gordon Brown was running a structural deficit of 5% of GDP in the pre-2008 good times. So he could say he has dealt with the damage from the crisis but still needs to deal with the damage from Labour.

But there’s still the matter of a £100bn deficit, which makes playing the fiscal responsibility card difficult, as does the prime minister’s promise of unfunded tax cuts after the election. The idea of enshrining in law a commitment to eliminating one definition of the deficit (the cyclically adjusted current budget deficit), which Osborne is set to announced, has the smack of desperation about it. Labour pledged a similar legal commitment to halve the deficit in 2010. Voters know such laws are made to be broken.

In general, as I have noted before, the problem has been with weak revenues rather than missed targets on public spending. Even on spending, however, where debt interest payments have been lower than expected, helping the totals, the coalition could have done better.

This week we will almost certainly hear of more spending for the National Health Service. When Ed Balls suggests something in the run-up to an important announcement – using the recent fines on the banks to pump £1bn more into the NHS – it is often because he has got wind of what the Treasury has been working on.

It is elsewhere, though, that the evidence of largesse during austerity has been most notable. There is a protected species in Britain, and they are called pensioners. Paul Johnson, director of the Institute for Fiscal Studies, wrote in a piece for The Times last week that by 2018-19 spending on pensioners will be £12bn higher than in 2010-11. This is partly because there will be more of them: a 2m or 20% increase in the number of over-65s in 2020 compared with 2010.

But it is also because the coalition, as Johnson noted, “those currently retired and hitting the state pension age over the decade have been spared most of the effects of austerity”.

That includes those reliant on the state pension, pension credit and handouts such as the apparently sacrosanct winter fuel allowance. But it also includes those receiving public sector pensions. The government will spend £36bn on these this year which, as Johnson put it, “are hugely more generous than almost anything in the private sector”. In a different era, Osborne used to talk about sharing the proceeds of growth. In this era he has distributed the pain to the extent that some people are not experiencing it.

We should look after pensioners, particularly at a time when their savings income has been hit by years of ultra low interest rates. But the largesse looks excessive and has hampered deficit reduction. And if it was intended to pay political dividends, so far it is not working.

According to a You Gov poll a couple of days ago, though 35% of over-60s back the Tories, against 29% for Labour, it is in this age group that support for Ukip – 22% - is strongest. Only 6% support the Liberal Democrats. Pensioners have responded to the coalition’s largesse by shifting their support to other parties. Ungrateful, or what?

That is not the only way in which Osborne has made deficit reduction more difficult for himself. Tory MPs and supporters love tax cuts. The only issue for them about the increase in the personal tax allowance to £10,000 was whether they or the LibDems should take the credit.

As it is, as I have written, in combination with weak growth in wages the allowance has made deficit reduction much harder. So did the repeated postponements of duty increases on petrol and diesel, which the chancellor easily acceded to under gentle pressure from his own backbenchers and white van man.

The deficit could and should have been brought down more. Slow progress is better than no progress at all, and maybe part of Osborne’s calculation is that if the deficit had been eliminated voters might have concluded that the country was safe again for Labour. But that’s too subtle. On deficit reduction , the chancellor has failed.