23 Mar 2011

Budget: zero sum game?

It was a thin Budget. It was only 97 pages long. By contrast the OBR’s report was 167 pages long. There were cheers for tax cuts, but all were matched by tax rises or spending cuts elsewhere. The most telling table? Table 1.62: Total policy decisions: 0.0, 0.0, 0.0, 0.0, 0.0, 0.0. How’s that for fiscal neutrality?

Truth be told, the Chancellor could have cancelled it and few would have noticed. That is not a criticism. There was a conscious policy decison here not to alter course whatsoever.

No, the real story was the borrowing numbers. £44.5bn extra borrowing over six years. The national debt is £40 billion higher at the end of the parliament than forecast just 4 months ago. The national debt peaks above 70 per cent of GDP now. The driving force for this is higher than expected inflation and weaker growth. If you believed that the Q4 GDP slump, unique to Britain, was the fault of the Chancellor’s economic policy, then the OBR figures are further proof.  If you believe the Chancellor, then you’ll feel that it would have been even worse without his austerity plan.

Weaker growth in recent months are a permanent hit to the level of economic output. That means that the extra £10bn borrowing shortfalls last for most of the parliament. This is the point of maximum danger for the Chancellor. None of his interesting growth initiatives have germinated yet. Yet austerity and a poor global outlook are making the deficit situation worse rather than better.

The Big Numbers in the Budget document were all going in the wrong direction. Growth down, borrowing up, national debt up, unemployment up and inflation up, versus November. The picture of the economy painted by the Office of Budget Responsibility is a picture of pain.

The question that was being asked in the Treasury was nowhere near giveaways. It was whether or not there should be further tax rises and spending cuts. Only the judgement by Robert Chote (head of the Office of Budget Responsability) that this budget hit is cyclical in nature prevented that.

That is why you should ignore the guff about helping ordinary people. All the supposed giveaways were funded by takeaways. The net impact of this budget this year is £10m or 0.0000067% of GDP. The tax allowance rise, worth in real terms a packet and a third of Maltesers (92 pence per week) wasnt big to start with, but will all be swiped back by a George Osborne’s signature CPI indexation change.

It would have been much more honest and consistent to say we don’t have any money, all hands on deck. It would not have been popular though. It does open up the Chancellor to further attacks on the austerity pain from the Opposition. Those attacks will find plenty of fuel in the OBR analysis.

* there are some interesting growth proposals. More on that later.