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18 March 2016

Budget 2016: A sticking-plaster Budget

George Osborne and his team will already be looking ahead to the autumn statement.

By Spencer Thompson

Spring has hardly sprung, but the Chancellor’s team will already be looking ahead to the autumn. This week’s budget was a placeholder, leaving the most important fiscal questions unanswered. It means that at future fiscal events the Chancellor will face a further difficult job to make the numbers add up.

At the time of the last autumn statement, the Chancellor was gifted £27bn to play with, almost all of which came through revisions to the OBR’s forecasting methodology. This has now unravelled and then some, with the Chancellor finding his overall budget £55bn smaller yesterday over the forecast period than it was four months ago.

You don’t have to look far to discover the reasons why. GDP growth forecasts have been revised down, as has the UK’s productivity growth and forecasts for earnings, consumer spending and equity prices. Added to this picture are policy decisions made in the budget, including cuts to income tax, freezes in fuel and alcohol duty, a reduction in capital gains tax and others. All of these factors combine to increase borrowing in 2016/17 through 2018/19.

Yesterday Osborne produced a surplus forecast in the key year of 2019/20, when he has promised to reach a surplus of over £10bn, through some truly baroque fiscal machinations.

Wheezes announced yesterday (or buried within documents) include:

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·  A number of giveaways that won’t have to paid for until later in the forecast period, including delaying the corporation tax cut until 2020/21; and switching the basis of business rate from RPI to the lower CPI, but not until that same year

· Pretend hypothecation. Both the insurance premium tax rise and the sugar levy were presented as funding specific items (flood defences and sport respectively). This is purely cosmetic: the money raised will go into a general pot, although if either tax rise doesn’t look to be translating into spending, expect fact-checkers to be holding the Chancellor to his commitment

·  A two-year delay to changes to the timing of quarterly corporation tax payments, having announced that the change would kick in in 2017 in the previous budget. This is just corporation tax receipts hokey-cokey, shifting money around to make overall fiscal numbers add up in 2019/20

· The extraordinary move to take £3.5bn away from departments in 2019/20 without specifying where the cuts would fall, and shifting a great deal of investment spending forward two years, paid for by slashing £1.6bn from capital spending in 2019/20, and a whopping £2bn cut from public sector pensions

·       The government has scrapped the carbon reduction commitment (which will cost money), and has removed a climate change levy exemption for renewable generation (which will raise money). The details are complicated, but conveniently for the Chancellor, in 2019/20 the CRC will still be in place and the CCL exemption removed, meaning an extra £0.5bn to make the numbers add up, a carefully-timed one-year only offer

· International development spending has been cut, despite being fixed as a percent of national income. What gives? A fall in forecast economic growth allows the Chancellor to cut £600m off the department budget in 2019/20, as national income is now expected to be lower

· Finally, an Osborne staple: making use of the avoidance and evasion magic money tree to bring in almost £3bn in 2019/20


Lots of the funds unlocked above are highly uncertain and in many cases contingent on further decisions that need to be made.


Thus, the Chancellor has his work cut out in future fiscal events. Firstly, he will have to find where the £3.5bn is going to be cut from government departments, a difficult task given so much government spending is now ‘protected’. Outside these areas, spending is already facing cuts of over 26 per cent by 2019/20. Factoring in the £3.5bn means they can now look forward to being cut by over 30 per cent.


In addition, he has more tax cuts to fund. The manifesto commitment to cut income tax will cost more than £5bn per year by 2019/20, which will need to be raised from cuts elsewhere or tax rises. If he continues to freeze fuel duty this could add another £2.5bn of pain. Added to this, past form suggests there’s a good chance that Osborne will be once again be given downgraded economic forecasts in the autumn, blowing a further hole in the deficit reduction path.


Can he manage to wheeze his way out of trouble again? The IFS think he’ll find it difficult to pull off yesterday’s tricks in the future. But it’s worth remembering how flexible the Chancellor can be when needed. Yesterday he was willing to breach both his target for public debt and the welfare cap. Will he shift on his target for a surplus in 2019/20? Watch this space.


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