Sunday, November 22, 2015
It isn't just the deficit where Osborne is struggling to hit his targets
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.

Though it is easy to dismiss such things as pieces of political theatre, Wednesday’s announcements from George Osborne – an autumn statement and a spending review – are rather important.

Autumn statements, it is true, come round once a year. If you think of them as mini budgets, which the headline writers often do, we have a budget or a mini budget every few months. Spending reviews are rarer. There was only one proper one in the last parliament, five years ago, and Wednesday’s is the big one for this parliament. It is big in more ways than one. As Osborne observed a couple of weeks ago, it will set out how the government will spend an eyewatering £4 trillion - £4,000bn – over this parliament.

What should we be looking for from the chancellor this week? I would say he has four targets. He has to detoxify the tax credit changes he announced in his summer budget, which were subsequently voted down by the House of Lords.

He has to demonstrate that his deficit reduction strategy is on course in this parliament, having been blown off it in the last one. That target will only be achieved if a third one, credible plans for reducing public spending, are in the spending review. Finally, there is a fourth target. Having talked up his commitment to infrastructure spending, and tempted Lord Adonis away from Labour to chair his new national infrastructure commission, Osborne has to match words with deeds.

Let me take these in turn. On tax credits, the chancellor will soften the blow of the cuts announced in the summer, while sticking with his £12bn of welfare reductions, which he needs to remain within his self-imposed cap. I suspect he knows he will take a political hit on this, in that no amount of tinkering or phasing will change the fact that there will be losers from the changes. Wednesday will, be about limiting the damage.

Interestingly, a report from the Institute for Fiscal Studies last week found that the tax credit changes, in combination with the new national living wage, will have one desired effect – apart from reducing the welfare bill – which will be “on average, to strengthen incentives to move into work and to work more if in work”. The trouble with averages, however, is that they can conceal problems. For some, such a single parents, the changes will reduce incentives to work.

Whether tax credits grab the headlines this week, or whether the chancellor comes up with an alternative headline-grabber, which is likely, the budget deficit will be an ever-present, as it has been during his chancellorship.

Indeed, irritated by the fact that some people are starting to argue that it is job done on the deficit – including some who argue that there was never a job to do even when it was more than £150bn – the chancellor and his officials have taken to talking up. Osborne spoke recently of this year’s deficit, predicted by the Office for Budget Responsibility to be just under £70bn – a figure that the latest data (released on Friday) suggested it will be hard to achieve - as adding to the “mountain of debt”. Treasury officials are happy to say that Britain’s deficit is bigger than Greece’s as a percentage of gross domestic product.

What this means is that the aim of achieving a budget surplus and maintaining it “in normal times” remains set in stone. Osborne has listened to the arguments of economists who say you should take advantage of ultra low interest rates and deliberately borrow more, and rejected them.

That means hitting his third target, further sustainable cuts in public spending. The IFS, again, has done the sums on this. In the July budget the chancellor set out plans to cut departmental spending by £11.3bn, or 3.2%, in real terms between 2015-16 and 2019-20. That sounds relatively painless.

Drill down into the numbers, however, and capital investment – infrastructure spending – is planned to increase by £4.9bn, or 11.5%. That increases the cuts to day-to-day spending, so-called resource spending, to £16.2bn, or 5.1%.

Drill down again and take out of that the planned increases of £7.6bn in spending on the NHS, defence, overseas aid and a freeze on schools spending, and the reductions on everything else increase to £23.7bn, or nearly 19%. By the end of the parliament, spending by these unprotected departments will have been cut by 39% in real terms compared with 2010.

Can it be done? The problem with the 2010 spending review was that it contained cuts but not much reform. This week’s effort is intended to include both. It aims to show that government can be smaller, in terms of what it spends, if it is also smarter. The template is the recent announcements on prisons, in which old Victorian prisons will be sold off, some of them to provide bijou apartments for hipsters, and replaced with modern institutions. As well as saving money, the intention is to provide better rehabilitation, saving money by reducing reoffending. Expect more such policies, as well as an outcry when the cuts are announced.

What about infrastructure? For the reasons set out above, Osborne is not going to tear up his deficit reduction plans and engage in a borrowing splurge to pay for a big increase in public investment. He says the government will spend £100bn on infrastructure during this parliament (small in relation to £4 trillion of overall spending). Broader OBR figures are for public sector net investment of £144bn in the next five years.

This will be supplemented by private infrastructure investment, including from abroad. Osborne tweeted approvingly a survey last week from Nabarro, the international law firm, showing Britain to be the top destination in the world for foreign infrastructure investment. Some will applaud that, while some will worry that too much of our infrastructure will be foreign-owned, and not just in the nuclear industry. Whether, even with that foreign input, Britain is spending enough upgrading our infrastructure will be questioned by many.

So four targets: sort out the tax credit mess, convince on deficit reduction, unveil achievable spending cuts and increase infrastructure spending. Whether Osborne can hit them will not be fully resolved this week. It certainly won’t be easy.