Sunday, November 29, 2015
Osborne keeps the ball rolling on public spending
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.

It is five days since the autumn statement and spending review but it is not too late to give credit to the man who made it possible. Sometimes we do not praise enough.

I refer, of course, to Robert Chote, chairman of the independent Office for Budget Responsibility (OBR). He and his team, by uncovering a £27bn underlying improvement in the public finances over the next five years, drove last week’s announcements.

Most of the improvement was due to a more optimistic view of future tax revenues. Without it, George Osborne would have been in some difficulty.

I should also single somebody else out for a mention: Mark Carney, governor of the also independent Bank of England. When, earlier this month, the Bank clarified its position on quantitative easing, saying that there would be no reversal until interest rates hit 2%, I don’t suppose many people considered the implications for the public finances.

But the OBR did. The £375bn of gilts – government bonds - the Bank holds on its books are effectively an interest-free loan to the government. The longer they are held, the lower the government’s debt interest bill. For complicated reasons, extending the period the Bank holds these gilts adds to government debt. But it reduces borrowing, which was more important in the context of last week’s announcements, by about £6bn over the next five years.

I am not suggesting for a moment that either the OBR or the Bank of England are anything other than independent. Chote and his team made life much easier for the chancellor this time but during the last parliament often made things more difficult. There are swings and roundabouts.

As for the Bank, it would be shocking if the Treasury had suggested that the QE clarification would be very helpful – a clear breach of the independence of monetary policy – that I cannot believe it could have happened.

What is a little disturbing about all this is that the changes announced by the OBR are essentially technical in nature, and they are forecasts. Forecasts, we know, are often wrong. Even this year, in which the OBR is predicting a small fall in the budget deficit compared with its summer forecast even though the monthly numbers point to an overshoot, the forecast could be wrong. The chancellor’s £27bn windfall could evaporate as quickly as it arose.

Would he respond by cutting spending harder or raising taxes further? I think we know the answer to that. This time four years ago the OBR had bad news for Osborne. It took a gloomier view of the economy’s potential and revised up its projections of future borrowing by much more than £27bn over five years. The chancellor could have responded by doubling up on austerity but chose not to do so.

So he is pragmatic, perhaps sensibly, about these things. When the OBR offers him a windfall, he goes out and spends it. When it lands him with a large bill, as it did a few years ago, he chooses to ignore it.

The OBR – set up to adjudicate on but not determine the policy stance – has been the tail that wagged the dog this time. It may do so again, but probably only if it comes up with good news.

Osborne was the lucky recipient of a windfall, although he made some of his own luck, while riding roughshod over his earlier promise to achieve all his deficit reduction through lower spending. He will raise £28.5bn in additional taxes over five years, £11.6bn from the apprenticeship levy, £6.2bn from higher council tax bills and £3.8bn from additional stamp duty on buy-to-let properties and second homes.

What we are left with as a result of this is chancellor who before the election gave us a roller-coaster for public spending – deep cuts in the early years followed by a sudden increase in the run-up to 2020 – with something much smoother. Osborne has done the opposite of what chancellors are supposed to do. For those worried about public spending cuts, he kept the good news back until after the election. Next year, 2016-17, there will be a £6.2bn net fiscal giveaway as a result of the autumn statement, according to the OBR, with a similar figure for 2017-18. There has been a lot of talk recently about the new politics. Post-election giveaways certainly are the new politics.

Osborne, of course, is political to his fingertips. He did not need to be told that he had a problem with tax credits. The losers, as I wrote here, were losing too much too quickly. But he thought it was a good idea to rein back the tax credits bill in July, and he thought it was essential to remain within his welfare cap. Jettisoning both may have been essential in political terms, and the OBR provided him with the means to do it, but it was a lurch, a screeching u-turn.

And we may not have seen the last of it. The Institute of Fiscal Studies and Resolution Foundation have pointed out, rightly, that it is a case of pain postponed for many recipients of the credits, who will face similar cuts with the switch to universal credit later in the parliament. But the chancellor has form. If he was prepared to scrap six months after the election, he will presumably be even more likely to defer or cancel the pain in the months leading up to the next one, even if it were to mean missing his target of achieving a budget surplus.

The big picture is that, while some government departments, and some public services, face further cuts, the squeeze has eased. Osborne is happy to talk about the £4 trillion, £4,000bn, he intends to spend over the next five years as funding “the things we want the government to provide in the modern world”.

In five years’ time, though he may not then still be chancellor, overall public spending will be 1% higher in real terms than he inherited in 2010, and 3% higher than now. Day-to-day spending will be up by 2.5% in real terms over the period.

Spending will be down to 36.4% on gross domestic product, it is true, from a recent peak of 45.7% in 2009-10. But this will have been achieved after more than 10 years of decent economic growth and will be higher, relative to GDP, than in the early 2000s. When the next downturn comes, spending will head back up to 40% of GDP or more.

Maybe Osborne’s bark was always worse than his bite. Maybe he has adjusted to the fact that he no longer has to be so tough on public spending to draw out Labour’s lack of fiscal credibility. Under the party’s new leadership it is on open display.

Or maybe, fiscal fatigue has set in. There were reforms in the spending review. Including devolving decisions to local level and transforming the prison estate, but there were not that enough of them to guarantee a permanently smaller state. Osborne is accused by his critics of wanting to destroy the state. He has just demonstrated, once again, that he means to preserve it.