The Staggers

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Osborne's £12bn black hole

Without further cuts and tax rises, Osborne will likely miss his pledge to eliminate the structural deficit.

By George Eaton Published 19 September 2011 10:28

As the Lib Dems fight in Birmingham to emphasise their "distinctiveness", it's worth remembering that they and the Tories are at one on the need to stick to George Osborne's deficit reduction strategy. Like Cameron and Osborne, Clegg and Cable argue that the adoption of a "plan B" would trigger a dramatic loss of confidence in Britain and a rise in interest rates. As Clegg told Andrew Marr on Sunday: "Does anyone seriously think that by ripping up the plan to balance the books, that somehow you will create growth by next Tuesday? It is a complete illusion. Actually what you would create is outright market panic, higher interest rates and more unemployment."

The coalition has pledged to meet two fiscal targets by the end of this parliament - the elimination of the structural deficit and a reduced debt-to-GDP ratio. But lower-than-expected growth (as the graph below shows, forecasters have slashed their 2011 growth predictions), reduced tax revenues, and higher-than-expected unemployment means that both goals are in doubt. Osborne was forced to announce an extra £44.5bn of borrowing at the Budget in March and the economic picture has only darkened since.

Average of independent forecasts for 2011

Source: Treasury.

Today's FT offers confirmation of the Chancellor's woes. The paper replicated the model of government borrowing used by the OBR and found that the structural deficit (the part of the deficit that remains even after growth returns) is set to be £12bn higher-than-expected. Consequently, without further spending cuts and/or tax rises, it's likely that Osborne will miss his pledge to eliminate the structural deficit by 2014-15, and he may not even meet it in 2015-16. Judging by this prognosis, all thought of a pre-election "giveaway" should be abandoned. Indeed, austerity may well last into the next parliament. The FT notes that plugging the black hole at the next Budget would require the equivalent of raising VAT from 20 per cent to 22.5 per cent. But if I was Osborne I'd be more inclined to adopt a version of Vince Cable's "mansion tax" in addition to other taxes on property and land. Polls show strong public support for new wealth taxes.

Of course, Osborne and his allies will argue that all of this vindicates the government's approach. If even the coalition's austerity measures can't eliminate the structural deficit, how would Labour do? But the opposition, in the person of Ed Balls, will rightly reply that it was Osborne's decision to cut (and tax) too hard and too early, that led to reduced growth and, consequently, a slower pace of deficit reduction. The widening gap in the public finances could turn the fiscal debate on its head - and not a moment too soon.

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Tags: Spending Cuts George Osborne

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13 comments

Mon, 2011-09-19 10:39 — swatantra nandanwar

How about a one off wealth tax or mansion tax to fill the vacuum George? Or some of your wealthy mates like Ashcroft stepping in to make up the lost £12b?
The Lib Dems are going to hammer tax dodgers? The Lib Dems are going to make the Bankers justify their bonuses? We've heard that one before Cable and Alexander. lETS SEE SOME ACTION, NOT MEALY MOUTHED WORDS.

Mon, 2011-09-19 11:03 — AlastairX (not verified)

This is completely wrong, George.

If you believe the "spare capacity" analysis, then the logic says that any attempt to boost demand beyond the point where "spare capacity" is eroded will result merely in higher prices (inflation) and no increase in real output.

So running a larger deficit would not help in that scenario; indeed, it would merely necessitate faster monetary tightening.

(Personally, I would say this stuff is complete bunkum. There are millions of people unemployed, and many more underemployed. If that is not your main measure of "spare capacity", your analysis is not well grounded)

Mon, 2011-09-19 11:18 — AlastairX (not verified)

And to be clear; there is no implication from the FT that the measure of "spare capacity" has *changed* because of the Coalition deficit reduction plan. Merely that it was never estimated accurately by the OBR in the first place.

Again, I don't find this analysis credible, but if you do follow the logic, the implication is that either:

a) the supply capacity of the economy was permanently devastated by the recession, or

b) the supply capacity was never there to begin with; e.g. there was an over-estimation of gross value added from the financial services industry which was distorting the GDP stats.

This logic is exactly the type of "policy defeatism" decried by Posen last week. Don't buy into it merely because you find it politically convenient to bash the Coalition.

Mon, 2011-09-19 11:19 — Awake!

i didn't know the man osborne was from a family that buolt a business that wmploys 200 people (is that right 200!!?!!?)
ok, so i'm less and dless interested in what balls, ed all the clowns have gotr to say- he's got building and runni9ng businesses in his blood- and Perhaps people might take that into account more- this site is full of armchair jokers with bgullshit non reasoned commentary drivgen by hatred of someobne cos of their schooling. Numpties...
Borrowing more than forecast, and yoyu reckon that had there been less cuts the conomy would have gown more so then more tax take and then would be ok blah blah blah -1% blah +1% & blah blah... how about lowest relative unemployment of indebted nations (debt adjusted), how about record low bond tields, how about 250k new jobs in last year, or hyow aboutr rebalencing of economy WELL under way etc... what? u think the effing clown balls could have managed this...£12 bn quid spen t by balls would have bought a credit downgrade, 3 weeks public sector paper clip consumption and opening a new school with gold plated taps in the bathrooms

Mon, 2011-09-19 11:35 — martybee (not verified)

Time will tell

Mon, 2011-09-19 11:36 — mcquade

"how about 250k new jobs in last year"

How about checking your facts first before swallowing what the prime minister says. Employment overall has only risen by 24,000 in the last year.

http://blogs.channel4.com/factcheck/factcheck-cameron-slips-up-on-employ...

It seems that Awake is in fact sunk in deep sleep.

Mon, 2011-09-19 11:41 — Dark Heart of Toryland (not verified)

@Awake

So what if Osborne comes from a family that runs a business? He has never sullied his hands by actually having anything to do with running it. And even if he had, running a medium-sized family wallpaper business is hardly comparable with being Chancellor of the Exchequer.

Mon, 2011-09-19 13:23 — Paul Hillyard (not verified)

The £12 billion black hole is seriously understated. I doubt Osborne will get borrowing much below £90 billion.
Unemployment underestimated.
Tax receipts over estimated.

The only ways to get this deficit down are through growth and inflation.

Mon, 2011-09-19 13:34 — K Rodgers (not verified)

@Awake..
"Perhaps people might take that into account more- this site is full of armchair jokers with bgullshit non reasoned commentary drivgen by hatred of someobne cos of their schooling."

If you are going to mention schooling make sure you use the spell check function first, otherwise you look like an ass.

wrt Gideon's (why do you all insist on calling him George!) business connections, he is far removed from any involvement and wouldn't have a clue how to run it either.

There is a reason that they called him thicko back at school and a reason he received a paltry 2:1 for the Modern History degree he took.

How and why this guy has anything to do with running our economy is beyond belief.

Mon, 2011-09-19 14:39 — Awake!

@ K rodgers
mm yes caps lock use paramount in showing how intelligent someone is- or may be they're very busy...as wittgenstein implied, it's the meaning that matters, not the s[pelling, so go figure crain boy.
Also u assert that he woudn't be able to run his family's business- how do you KNOW that? Ah i see, just an opinion...then he only got a 2.1 degree (degrees so important to some ) i thought 2.1 was very decent as a score in a, ahem, exam.. i mean at uni u moht not be so focused on 'studies', so what is you point? there isn't one, it's just more politics of envy, jealousy and hate
@dark heart
Coming from a family that has built something does matter.It's obvious. How it needs explaining underlines what the left is so lacking of right now- EXPERIENCE (and anyone whose family has worked hard to build something gets it) . It's also why u get looney right wingers, the hatred gets passed down from generation to generation, the children growing up hearing how xyz stole granpa's life and hard work.

Thu, 2011-10-06 00:27 — Oliver Healey

Nationalise Britain politically and financially by withdrawing from the European Union. It costs us £8bn per year and is not working it imposes regulations that don't work. Over one decade a large bulk of the national debt would disappear just by withdrawing from the EU. £80BN if we won't zero national debt and public service investment we need to withdraw from the European Union

Thu, 2011-10-06 00:31 — Oliver Healey

The English Democrat solution to the economic crisis is our National Debt Plan which is broad and well structured with the main savings coming from ending our involvement in the European Union over one 10year period we would save £80bn. In addition to ending the subsidy to the private rail operators would save £50bn. Cutting the £1bn cost of Parliament by half and by putting national assets like the BBC and Channel 4 up for sale. Public Sector Pensions will be reformed by ending occupational pensions to public sector workers on £65,000 per year we can't afford it anymore. But the low paid will not be targeted. The savings from reviewing Barnett Formula would save £50bn over 10 years it is these savings that will repay the deficit not through restraining pay of low paid public sector workers. Management grade jobs will be targeted and targeted ruthlessly as we review and dismantle the years of excessive pay growth in senior management in schools, and the Military. Aviation Industry receives £7billion subsidy every year and so that will be cancelled we need to look at reducing the deficit and reversing the cuts being made in real services and real jobs. Redundancy payments will cease once a public sector worker earns over £40,000 we need to stop managers getting such payouts we can't pay everyone. This national pay freeze is not working a pay cut at all levels of public service should kick in on salaries over £40,000 per year. But one policy is definite it's time to quit the European Union and take our money back.

English Democrat