18 Jun 2010

George Osborne’s self-imposed budget trap

As the Chancellor sits down for a weekend of writing what will be a seminal budget speech he faces next Tuesday at 12.30pm, one completely new and rather important dilemma. And unlike the deficit, he only has himself to blame for this one.

It comes as a result of his welcome (and brave) decision to create an independent Office of Budget Responsibility (OBR) to put out new fiscal forecasts. It could put the chancellor in a rather novel political peril. I, at least, can’t see the way out.

Let me explain.The figures in the OBR’s forecast that I reported on Monday, will not be the final figures actually in the budget.

The OBR will have to update its assessments of the deficit, the debt, growth and unemployment, to take into account the significant tax rises and cuts to total spending that the chancellor will announce on Tuesday.

So if, as must be an economic and mathematical certainty; the ‘savage’ cuts have a direct assessed impact on reducing growth, and increasing the assumed path for unemployment, then we will have a quite stunning piece of information. We will be able to tell you, by comparing next week’s numbers, to this week’s, the precise growth and unemployment cost of the new chancellor’s austerity plan.

In theory, I should be able to tell you on Tuesday night that the Budget has cost x00,000 jobs, and cut Britain’s growth by, say, half a per cent. This would be information that we have simply never had before, and it arises out of the OBR process.

It would be manna from heaven for the opposition, and for deficit doves. A direct verdict on the immediate growth-sapping effects of sharp cuts.

Today’s public finance figures continued the trend of the massive fiscal stress  gradually easing, with deficits slightly down, and a return to growth boosting VAT receipts, and income taxes (as well as the new 50p rate). Far from the budget numbers being ‘worse than we thought'[, the comparison of the two OBR assessments with every factor the same bar George Osborne’s fiscal policy, could show that it was his policies that ‘make it worse than we thought’.

The chancellor’s aides have already cottoned on to this. They are trying pre-emptively to point out that the two figures won’t be a fair like-for-like comparison, for reasons I covered on Monday.

There is another possibility, of course. Sir Alan Budd’s OBR, (which I praised for its independence of thought on Monday) may feel that it wants to fudge the issue. Though politically understandable, that surely would be the best way for the organisation to obliterate its credibility eight days after it began its work.

The fruits of candour can sometimes be rather rotten.