If you’re the kind of person that finds money down the back of your sofa, the chances are you’re the kind of person that also loses it down there in the first place. That’s the lesson the Chancellor was taught by his budget yesterday.
At the centre of all the Commons rhetoric, stats and pun-strewn newspapers this morning is a major deterioration in the Office for Budget Responsibility’s forecast for the public finances over the coming years: a £55bn fiscal hole, reversing more than twice over the £27bn fiscal windfall the OBR gave the Chancellor from the back of the sofa just four months ago at the Autumn Statement.
While the global backdrop has undoubtedly raised new challenges for the UK economy, that isn’t what is doing the damage. Instead it is the OBR’s judgement that the British economy is not just smaller after the financial crisis, it is also only capable of increasing productivity and growing at a slower rate going forward. This has major implications for the UK’s growth capacity, for living standards and for the public finances – that £55bn again.
Faced with this deteriorating backdrop, the Chancellor talked about the need to be tough while actually (and sensibly) allowing most of the forecast increase in borrowing to take place over the next few years. Indeed he actually increased the fiscal hole by cutting income taxes from next April.
But the red line for the Chancellor was ensuring he still met his fiscal mandate of eliminating borrowing and running a surplus in 2019-20. Delivering that, while allowing borrowing to increase in earlier years, required him to pencil in a sharp reduction in borrowing in that (pre-election) year.
The plans the Chancellor announced yesterday imply a £32bn borrowing reduction in 2019-20, by far the largest in this Parliament. In cash terms it is actually £10 billion more than any year to year reduction since George Osborne became Chancellor. Of course it is fairer to compare borrowing reductions as proportion of GDP – because a bigger economy obviously finds a given change easier to both deliver and absorb. Here’s a chart making that comparison for every year since the middle of the last century.
Annual reductions in borrowing since 1949-50
Under George Osborne the borrowing cut planned for 2019-20 is comparable only to the first two years of the last parliament – when he had just entered office in the immediate aftermath of a financial crisis and with legislation guaranteeing it would be three years until an election. It is true that similar borrowing reductions have taken place as a share of GDP before, but only rarely – and in only one pre-election year since the Second World War. It may be possible to cut borrowing as much as the Chancellor has pencilled in for 2019-20, but it’s a brave man or women that says it’s likely.
You might say that the OBR would only have put such a big borrowing reduction into the forecasts if there were concrete plans to make it happen. But the detail of those plans do not provide total confidence, including as they do switches between years of capital spending (a little over £1bn) and corporation tax revenues (£6bn), alongside a promised but yet to be identified further £3.5bn cut to departmental spending. A planned half a billion cut to aid spending is deliverable. Whether you think it is right or wrong is another matter.
So where does that leave the Chancellor’s plan for a £10bn surplus at the end of this Parliament? I’d say that without faster growth turning up between now and then, or significant tax rises it’s looking less likely than the close to 50:50 that the OBR puts on any surplus at all turning up. If the OBR was a bookie you’d put some money down against it happening at those odds.
If the Chancellor wants to improve the chances of meeting the target he could revisit plans for yet further increases in the income tax personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020. The progress towards these measures announced in the Budget – which relate to 2017-18 – will cost £2bn (rising to £2.6bn by 2020-21), making the job of getting the public finances back on track that bit harder. They are highly regressive too, boosting the incomes of the richest fifth of households by an average of £225, compared to an average gain of just £10 among the poorest fifth of households. And that, combined with other major policy announcements made by the Government since last year’s election, results in the poorest fifth of households losing an average of £550 in 2020, while the richest fifth of households will gain an average of £250.
Distributional impact in April 2020 of all post-election policy announcements to date
The Chancellor has done the right thing by not over-reacting in the short term to swings in the OBR’s fiscal forecasts. His priority yesterday was to show that he still had a plan to deliver a £10bn surplus in the last year of this parliament. We think that plan requires what you might politely call an ambitious cut to borrowing in a pre-election year – although time will tell. He would have been better advised to focus on a plan for increasing productivity, the collapse in which is the underlying drive of the fiscal problem he now faces. That’s the real challenge facing us as a country.
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