The final budget of this parliament was a strange mix of prudence, politics and fiscal shenanigans
ON MANY occasions in the past few years George Osborne has carried a rain cloud into the House of Commons. Britain’s growth forecasts had been revised down yet again, he would explain; borrowing would be higher than expected. But as he stood to deliver his sixth (and perhaps last) budget as chancellor of the exchequer on March 18th, Mr Osborne was cheery—partly because the weather has truly improved, partly because he was about to deploy a clever ruse.
Britain grew faster than any other economy in the G7 last year, Mr Osborne boasted. The national employment rate, at 73%, has never been higher. The falling oil price has cut inflation, which will this year end a dismal seven-year stretch of falling real wages. The government is saving money on inflation-linked debt interest payments and on benefits, which are often linked to prices. And because oil is largely imported, lower inflation has not dampened domestic tax receipts the way it otherwise might.
As a result, Mr Osborne is drawing a little closer to the goal that has defined his tenure (see chart 1). In 2010 the Conservatives argued that Britain’s structural budget deficit, then 9% of GDP, was a huge threat to the economy, and pledged to close it. In combination with the Liberal Democrats, they set out on a course of austerity that has involved cuts of roughly one-fifth to departmental budgets outside a “ring-fence” protecting the National Health Service, schools and international aid.
The crisis in the euro zone and a British economic slump led the chancellor to toss out his original plan of closing the structural deficit by 2015. He now intends to get there three years later. And there was some good news on that score. The Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, revised down its forecast for borrowing by £1 billion-2 billion ($1.5 billion-3 billion) a year for most of the next parliament. The national debt as a share of GDP will fall in 2015-16, partly as a result of flogging some assets, including £9 billion worth of shares in Lloyds Bank, which the state rescued during the financial crisis. Mr Osborne boasted that he was resisting the temptation—to use these windfalls to pay for pre-election giveaways. This budget, he said, was fully funded.
That is true of his policy announcements, but not of his plans for total spending. Chancellors need only sketch out the latter, and Mr Osborne has drawn a deeply peculiar line (see chart 2). He has pencilled in deep cuts to public spending over the next two years—deeper than any annual cuts in this parliament. That allows him to keep a pledge to balance the budget excluding investment by 2017-18 and realise an overall surplus in 2018-19.
But then something odd happens. On Mr Osborne’s new plan, day-to-day departmental spending rises by £24 billion in the final year of the next parliament—the biggest real-terms increase in a decade. In cash terms, this completely reverses the cuts, though economic growth ensures the books still balance. Whereas previously Mr Osborne had sought a surplus of £23 billion in that year, he now plans to be only £7 billion in the black. Factor in better growth and that means departmental spending £31 billion or 9% higher. For departments outside the ring-fence this could mean cuts ultimately only about half as bad as they were facing before Mr Osborne rose to the dispatch box this week.
This is a trick, but it is good politics. The autumn statement last December had implied that Mr Osborne planned to cut public spending to 35% of GDP, the lowest ratio since the 1930s, by the end of the next parliament. Labour seized on that, accusing the chancellor of planning to unpick the post-war welfare state. Applied to a man from a gilded background, who strikes voters both as hard-headed and hard-hearted, that was a potent line of attack. Mr Osborne’s new spending plan appears to head it off. Indeed, he claimed that the parallel was now with the year 2000.
The budget contained more than just trickery. Most Britons will benefit from a further boost to the amount they can earn before paying tax. The chancellor had already raised this from £6,475 in 2010 to £10,600 in 2015-16. Now, it will hit £10,800 in 2016-17 and £11,000 the year after, contributing £80 to most pay packets.
The chancellor giveth
A Liberal Democrat idea, raising the allowance is popular: one poll puts support for it at 83%. Both the Tories and the Lib Dems pledge to raise it to £12,500 if re-elected, which would take those earning the minimum wage out of income tax altogether. But the threshold is already so high that the poorest fifth of workers did not pay income tax at all last year, according to the Institute for Fiscal Studies, a think-tank. The latest rise helps middle- and high-income households more than poor ones.
Mr Osborne also announced several other sweeteners. Those saving for their first home will benefit from subsidies of up to £3,000 each. The young, who find it ever harder to afford Britain’s pricey houses, will probably welcome this. But by boosting demand for homes without expanding supply, it will push prices up, benefiting homeowners most. More welcome were the chancellor’s other giveaways: a plan to devolve more tax revenue to Manchester and a tax cut for the North Sea oil industry, which has struggled since the oil price began to fall.
These giveaways will be largely paid for by three measures. Two—a fresh clampdown on tax avoidance and higher taxes on banks—are bound to be popular. The third, a reduction in tax subsidies for large pension pots, was a policy Labour announced just weeks ago (see next article).
The budget, then, was a curious mix. On the one hand, the chancellor sought to demonstrate responsibility, by fully funding his pre-election schemes. On the other, he penned a plan that sacrificed credibility for political advantage. In 2010 Mr Osborne created the OBR to stop chancellors manipulating growth forecasts. He has now shown that the spending figures can still be fiddled.
This article appeared in the Britain section of the print edition under the headline "Bust to boom"
