Sunday, March 22, 2015
No roller coaster - but the tail wagged the dog in a curious budget
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.

This is a strange world, and we have just had a rather strange budget. There was some jam today, though it was spread pretty thinly. There was also less austerity tomorrow, as suggested here last week. But the overall impression was odd.

George Osborne had two aims: to demonstrate that only he can be trusted on the deficit and debt, and to kill the silly idea that he was planning, if re-elected, to cut public spending to the levels of the 1930s.

The fact that achieving both of these aims means, at this stage, merely ensuring consistency with the forecasts of the independent Office for Budget Responsibility (OBR) – which even its best friends would say has a forecasting record that leaves a lot to be desired – added to the Alice in Wonderland quality of all this.

We have policy driven by forecasts which will almost certainly turn out to be wrong and, perhaps even worse, we have a fiscal watchdog, the OBR, which has produced a “rollercoaster” projection for spending by government departments over the next few years (down very steeply then up), which no sane person thinks is remotely likely.

How did it come to this? How did the forecasting tail come to wag the policy dog? Why did the OBR, having given us that 1930s’ comparison after the autumn statement in December, give us the rollercoaster this time?

For Osborne, having determined that he would not fight the election with a giveaway but by reinforcing his reputation as the man who brought Britain back from the fiscal brink, it was necessary to resort to a few gimmicks to achieve his original aim of having public sector debt falling as a percentage of gross domestic product by the end of the parliament.

This, you may remember, was one of his original 2010 aims, but appeared to have been pushed out well into the next parliament in 2012. Wrenching it back again was a coup, though lewss of one than it looks.

I imagine the conversation between Osborne’s team and the OBR went along the lines of; Treasury: “What do we need to get debt falling in 2015-16?” OBR: “Quite a lot because that is not what our forecasts are showing.” Treasury: “What if we sold some assets?” OBR: “That could do it.”

So debt is coming down, from 80.4% of GDP this year, 2014-15, to 80.2% in 2015-16, if the new forecasts are right. To achieve it, Osborne has raided the piggy bank. £13bn of Northern Rock and Bradford & Bingley assets acquired in the crisis will be sold off, as will £9bn of Lloyds Bank shares. Nothing wrong with that – their place is in the private sector – but if the timing of the sales is simply to meet a debt target there is a real danger that taxpayers will not get value for money.

The other imperative, to get away from the charge that he was cutting spending to 1930s’ levels as a percentage of GDP, produced even stranger outcomes. I thought I had been pretty hard on the silliness of this comparison, but the eminent economic historian Professor Nick Crafts took me to task for not being even harder. In the 1930s, he points out, public spending was typically 25% of GDP. Spending on social services – education, health, welfare, pensions and housing – was 9% of GDP, compared with 28% now. Overall public spending by 2020 will be at least nine times what it was in real terms in the 1930s.

Nonsensical or not, Osborne felt obliged to respond to it, hence the bizarre lurch at the end of the parliament, when the projected budget surplus of £23bn for 2019-20 (1% of GDP) is slashed to £7bn (0.3% of GDP). Public spending, having fallen, suddenly starts rising strongly, simply to get the ratio of public spending to GDP up from 35.2% - that 1930s’ comparison – to 36%, Gordon Brown in 2000 before the splurge. The tail, again, is wagging the dog.

Because of this, which I suspect happened very late in the budget process, and because of what in the end seems to have been a serious breakdown in relations between the Treasury and the OBR, we now have little idea about public spending in the next parliament. The OBR will not take account of Osborne’s planned £12bn of welfare cuts and £5bn of savings from reducing tax avoidance and evasion because the former are not coalition policy and have not been detailed, and the latter have not been detailed.

The result is a bit of a mess. I am sure that, as the always reliable Paul Johnson of the Institute for Fiscal Studies put it: “We won’t be on the OBR’s rollercoaster” - whoever is in charge. But the OBR could only work with the material it had and the upshot is that, even with an independent fiscal watchdog and work by bodies such as the IFS, we know precious little about the main parties’ plans. I criticised Labour in 2010 for ducking a comprehensive spending review. It is little better now.

Which is a pity. Even on the OBR’s cautious forecasts, it is quite likely that the lion’s share of austerity is already behind us, given the positive effects of lower inflation and lower interest rates on government debt. Osborne’s claim in the budget that Britain is “walking tall again” chimes with most of the data.

For two years the economy has been growing well, even as deficit reduction has continued. Britain compares well with her G7 peers.

The labour market has been a particular success, with the employment rate a record 73.3%, a near 2m increase in employment in this parliament in the context of public sector job cuts, and the growth in jobs concentrated in full-time roles; 85% of the net new jobs created over the past two years.

Real household disposable incomes per head are an appropriate measure of living standards and, as I have frequently pointed out here and the OBR confirms, will be higher at the end of this parliament than at the beginning. This year should see the sharpest rise in living standards since 2001.

It is a good electoral platform. Osborne’s very obvious message was that all this and more would be put at risk by a change of government. Repeated often enough, it should move the Tory dial up in the polls. It is a pity, however, that the budget, and it should be said Labour’s response, merely reinforces the impression that politicians are playing games with the voters. Transparent, it is not.