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”.

7 reader comments

  1. Ivan Horrocks says:

    Budd may have ‘more than proved his independence’ with some of his forecasts/figures, as you claim, Faisal. But others leave me not so sure. For example, what about his employment forecast? You cannot honestly believe these are correct as they are completely illogical: unemployment peaks in 2010; the claimant count continues to decline.
    What! On the back of the ‘savage’ cuts to be announced next week.
    Personally this smacks not of independence but of a surreptitiuos attempt at PR. That is, making things sound rosier than they really are. Very convenient for the government, don’t you think?
    Anyway, you get my drift. And there are plenty of other examples like this (e.g. business profit forecast).
    If you get a chance perhaps you could ask Sir Alan how he arrived at these upbeat forecasts.
    Best
    Ivan

  2. adrian clarke says:

    Faisel, i am rather surprised at your comments.The OBR did make the case for cuts and the fiscal deficit being worse than predicted.It lowered the growth rate significantly,which in turn makes the black hole much larger

  3. Tom Wright says:

    I suspect that Osborne is playing a long game and planning for the 2015 election.

    Cutting spending and eliminating the deficit quickly will leave him room to credibly promise tax cuts, or even promise major public sector spending rises – he can blame the pain on Labour now, and go wherever the wind blows when we head to the ballot box.

  4. Sabine K McNeill says:

    Labour brought in the “Debt Management Office” to ensure that the National Debt (est. in 1694 at 8% for the first time) would stay.

    The Coalition brings in the OBR to make sure that the Bank of England, i.e. the City, holds the power over Westminster.

    Meanwhile, it’s “business as usual”:
    * bankers create money as credit out of thin air and lend it at interest
    * central bankers do the same and call it “quantitative easing”
    * the Treasury “forgets” to print its money free of interest and cuts its expenses or raises taxes.

    The taxpayer and bank customer always loses.

    Look at the 10-year analysis of the budget and watch the deficit jump in 2008: http://bit.ly/aYhEnT

    Every housewife and businessman knows not to overspend. But the government has PSBR built in – so that “vested interests” receive their interest payments…

    The camouflage of what’s really going on is remarkable!

    More on http://publidebts.org.uk

    1. Meg Howarth says:

      http://www.moneyreformparty.org and http://www.call4reform.co.uk

      are worth looking at to supplement what Sabine says above. A debt-through-credit is the crux of the issue. This needn’t be so, if we don’t want it to be. It’s up to us.

      Also http://www.policy.greenparty.org.uk/downloads/mfssid/pdf for an explanation of a tax on land (LVT).

  5. Andrew Dundas says:

    Let’s remember the OBR’s predicted 2.6% growth rate, and the lower government debt and falling unemployment from next year. Each is better news than the coalition foresaw.
    These will be useful yardsticks for measuring the effectiveness of government policy.
    If (as I expect) subsequent Government policy makes both unemployment and net debt higher than the OBR has forecasted, we shall know whom to blame for those failures: Osborne, Cameron & Clegg.
    Their coalition is so confident that their cuts will not damage the fragile recovery, they may have overlooked how easy it is to make our prospects much worse.
    That’s when that coalition will turn sour.

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