14 Jun 2010

OBR doesn’t make case for savage cuts; but Osborne will choose to do so

The release of Sir Alan Budd’s independent Office of Budget Responsibility forecast is an extraordinary moment in Britain’s economic management.

Firstly, it’s immensely impressive that this new government has eschewed the power to cook the books. It is an important, useful power that enables governments to squirrel money away, time tax cuts, and generally abuse statistics for partisan purposes.

It has been in Chancellor’s prerogative since the 1974 Industry Act. It is a brave Chancellor that gives up this power.
However, my second point is that today’s OBR has far from backed up the current government line on the deficit. Nick Clegg, the chancellor and the prime minister have lately all been claiming that their initial look at the books has unearthed various subterranean horrors lurking in the hidden cells of the Treasury spreadsheets, hidden by a dying, desperate Labour government. The government should promptly retire this line of argument.

When the deficit is lower in each and every year, and the overall level of borrowing £32bn lower than at the March 2010 budget, it is difficult to sustain the suggestion that the coalition has unearthed an extra fiscal black hole.

Perhaps the best illustration of this is the fact that barely ten minutes after the forecast was presented, a senior aide to the chancellor explained why the OBR were “understating the extent to which [the public finances] are worse than thought … potentially by a significant amount”.

There are two reasons for this: this forecast is not cautious (the Treasury normally factors ‘caution’ in by assuming higher unemployment and lower tax receipts than expected, not the OBR), and it assumes market interest rates (which already factor in a likely additional government cuts programme).

But it is unquantifiable, and is counterbalanced by the fact that the already announced £6bn of cuts aren’t included in this forecast.

So overall, the chancellor has not got the mandate for radical further action he would have ideally liked from this report.

Of course it does illuminate that Alistair Darling had already pencilled in £44bn of cuts before the election, but the new chancellor cannot credibly blame his decision to accelerate this on a ‘shock’ in today’s report.

Next week’s epic budget will see additional cuts or tax rises made out of political choice rather than through objective economic necessity.

The chancellor could though choose not to put VAT up, for example. But here’s my current best guess: Chancellor Osborne is going to go for it. He wants to eliminate the entire structural deficit, possibly even during this Parliament (2.8 per cent of GDP in 2015 would mean an extra £46bn of cuts or tax rises).

He would like to start to actually lower the national debt, not just the rate of its growth. So VAT up, a raft of green taxes too, alongside a fundamental downsizing of the state, dressed up as ‘unavoidable’ spending cuts.

* It should be said that Sir Alan Budd has more than proved his ‘independence’. The report is hardly the smoking gun that Number 11 might have preferred. There are also three clear areas where Sir Alan’s script seems closer to Alistair Darling than that of the Coalition.

Para 4.35, page 38: “These [deficit] improvements are driven by … the policy measures announced by the previous Government to reduce the deficit”.

Para 3.24, page 15: “Household income was relatively strong through the recession as weaker salaries were supported by tax changes such as the temporary cut in VAT’.

Para 3.5, page 10: “Another major area of uncertainty is whether, and to what extent, private sector spending and employment are able o fill the gap that the cuts in public spending in our forecast leave”.