Sunday, March 15, 2015
Osborne: some jam today, will there be less austerity tomorrow?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

George Osborne’s sixth budget may not go down as his most memorable – the expectation is that it will be a political rather than an economic event – but it will be no less important for that.

The backdrop to the budget is better than the chancellor might have hoped, and not just the “feelgood” effects discussed here last week. The public finances are also looking a little better.

Price Waterhouse Coopers (PWC) predicts that the fall in oil prices and lower gilt (government bond) yields will reduce the budget deficit in each of the next five years compared with the Office for Budget Responsibility’s autumn statement forecast. The cumulative undershoot, £32bn, is not huge but it not to be sneezed at either.

Goldman Sachs predicts a deficit undershoot of £8bn for this year alone, followed by £13bn next year, 2015-16. Its prediction of £83bn of borrowing this year would take Osborne close to halving the deficit in cash terms, in addition to as a percentage of gross domestic product. Next year’s £63bn prediction would take us closer to normality; in the five years leading up to the crisis, the last government borrowed an average of £45bn a year in today’s prices.

The improving public finances should allow Osborne to sprinkle around a few sweeteners; some jam today. They should include a further raising of the personal income tax allowance, now and next year, as reported by this newspaper last week, as well as populist measures on beer, wine and petrol duty. I think we can safely assume that the chancellor will not take advantage of the fall in oil prices to push up petrol duty.

He is constrained by the fact that the deficit, while falling, is still very large, and that this will still be a coalition budget. But Osborne may still give us some old tunes, such as inheritance tax, if only as an ambition if re-elected rather than hard action.

Though pre-election budgets are often holding operations – Alistair Darling’s 2010 effort did not stick long in the memory – there is nothing to stop Osborne being bolder, and I am sure he will try to be. Setting out a series of announcements that will only be implemented if you are returned to office has a certain appeal.

Can Osborne combine jam today with less austerity – or at least a less austere image – in the next parliament? He has a good recent record of wrongfooting Ed Balls, his Labour opposite number, on the deficit and the recovery. He is helped by the fact that his opponent rarely resists the temptation to exaggerate.

The Balls’ approach is often to think of a number and double it. Balls is intelligent – in a New Statesman profile the former cabinet minister Peter Hain says he has the best economic brain in parliament – and affable. But he comes over as a bulldozer and, perhaps because he is intelligent enough to know when he is laying it on too thickly, never entirely convincing.

So in a speech last week he said Osborne had borrowed “a staggering £200bn” more than he planned in 2010. The true figure, confirmed last month by the Institute for Fiscal Studies, is £100bn.

Balls said wages after inflation are down by more than £1,600 a year since 2010. The true figure, using the consumer prices index he was instrumental in making the main measure of inflation, is £700 a year. Adjusted for the old retail prices index, no longer regarded by the Office for National Statistics as being worthy of national statistic status, the fall is bigger but well under £1,600 a year.

As for public spending, and Balls’s “unprecedented” £70bn of cuts, the figures are clear. In cash terms overall public spending will rise by £43bn between now and 2019-20; the duration of the next parliament (assuming it lasts five years). In real terms there is a planned cut, though less than £20bn. To get to £70bn, or anything like it, you have to add up all the areas where the coalition is planning to increase spending, including public investment, and subtract the rest. It is, to say the least, an odd approach.

That said, as I wrote here on February 8, Osborne has got himself into a less than ideal position on public spending. Spending has been cut by much less than most people think (day-to-day spending has not been cut at all in real terms) yet the chancellor is in danger of being seen as a mad axeman, determined to slash the state for ideological reasons.

The Office for Budget Responsibility (OBR), by saying after December’s autumn statement that Osborne’s plans implied the lowest public spending to gross domestic product (GDP) ratio since the 1930s, 35.2%, gave Labour an economic lifeline. It is an almost meaningless comparison. But it has political force.

Part of the chancellor’s task, therefore, is to convince voters, and sceptical financial markets, that his fiscal plans are credible, and can be delivered without extreme pain. Part of the reason Goldman Sachs is more optimistic than the OBR about the budget deficit over the next 2-3 years but not over the longer-term is because, as its UK economist Kevin Daly puts it, it doubts the spending numbers outlined in the autumn statement will be delivered. If there is another coalition after the election, they may never have to be.

Will the public finances improve by enough to allow Osborne to say that he can meet his ambition of delivering a budget surplus while running higher levels of spending than OBR projections suggest?

Those projections suggested spending would need to fall to 36% of GDP to generate a small budget surplus; slightly higher than when Gordon Brown was chancellor in 1999-2000. But to get a surplus of 1% of GDP, it would need to fall to 35.2%.

Can Osborne cast off those comparisons with the Neville Chamberlain era? He could, though it should be said that the Treasury is playing down the extent of any improvement in the public finances since the autumn statement.

They probably would say that but officials say there are swings and roundabouts: lower oil prices hit North Sea revenues first and may or may not boost other revenues later. Low inflation and gilt (government bond) yields produce some savings on debt interest but the effect should not be overstated.

Even so, the budget this week looks like being a combination of some jam today coupled with a little less austerity tomorrow. Whether it works, and whether it is even noticed by voters, will become clearer in the next few weeks. Depending on what the election throws up it may not, of course, be the only budget this year.