Osborne’s Prudence Still Rests on Heroic Forecasts

“The sun is starting to shine and we’re fixing the roof,” said a svelte-looking George Osborne. While last week’s budget involved a touch of fiscal loosening, and some predictably ridiculous statistical sleight of hand five years hence, the most important aspect of the Chancellor’s final Commons outing before the election was that he didn’t open the sluice gates and let public spending rip.

Yes, I know the pace of fiscal consolidation in the next Parliament, on these budget-day plans, is to be a bit slower, with a surplus of £7bn expected in 2019-20 rather than the £23bn outlined in the Autumn Statement. As such, the Tories will now apparently miss, just, reducing government spending as a share of GDP “to its lowest level since the 1930s”.

Before criticizing last week’s budget, and criticize it I will, I’d like to make something clear. The Chancellor took his place at the despatch box just 50 days before a general election. What we’re facing on 7 May isn’t just any general election – but the closest, most uncertain UK political contest in living memory.

At stake, aren’t just the keys to Number 10, as ever, but arguably the existence of our nation. If the electoral arithmetic is particularly tight, the Scottish National Party could force a repeat independence referendum during the next Parliament, potentially reversing the 1707 Act of Union and dismantling the UK.

Given all that, even though I have big problems with the state of the UK’s public finances, as regular readers will know, I genuinely believe something positive has happened in British politics – at least for those of us who want the UK to stop piling hundreds of billions of pounds of government debt on our children and grandchildren.

For all his wisecracks and budget bonhomie, Osborne was under immense pressure to do the political business last Wednesday, to produce a budget converting a partial recovery into votes. He could, very easily, have pressed the “more spending” button. He could, with a flick of his Treasury pencil, have secured crowd-pleasing headlines of hand-outs and tax cuts, dismissing as humbug technical objections from nerdy columnists like me. A big giveaway, after all, is almost compulsory in pre-election budgets – for both Tory and Labour Chancellors.

Osborne plumped, instead, for a neutral pre-election budget. He judged, rightly, that promoting fiscal prudence, and at least paying lip service to getting our deficit down, is more popular with a higher number of voters than a spending splurge. That could change, of course. As polling day approaches, and the campaign rhetoric escalates, Labour warnings of NHS abolition and public service penury could cause a Tory panic. Talk of balancing the books would then evaporate with our political parties, as so often, conducting a dutch auction of promises, ratcheting projected borrowing up.

For now, though, even ahead of this tightest and most significant of elections, the Chancellor has denied his party the usual campaign sweeteners – in turn, keeping Labour’s impulsive profligacy in check. That represents progress, while pointing – I sincerely hope – to a shift in our political culture.

And, for that, Osborne deserves credit – not so much for his courage, but for having the sense to realize that, beyond the baying unions and the metropolitan media, what most Brits want is a smaller, more humane public sector, a state that does less but does it better, a government that is grown-up, honest about what it can and can’t do and, above all, which lives within its means.

For, as so many voters instinctively know, fiscal restraint is desperately needed. While I’m glad Osborne is campaigning on prudence – a return to an annual budget surplus by 2018-19, the first in almost 20 years – his numbers rest on rosy assumptions. The Office of Budget Responsibility forecasts growth of 2.3-2.4pc per annum over the next five years – which may or may not happen.

UK growth since 2010, for instance, has averaged just 1.8pc. Will we really now achieve such a significant and sustained increase? The Eurozone remains moribund, the Middle East is on the edge of turmoil and share prices are looking decidedly toppy. So, our largest trading partner could re-enter recession (to say nothing of systemic meltdown), oil prices could spike and there are growing fears of a nasty stock market lurch.

I’m not saying all three things will happen or even one of them. But we probably need all three not to happen to achieve the growth upon which Osborne’s 2018-19 surplus rests. And just think how overly optimistic our fiscal forecasts have been over the last Parliament. In his June 2010 “emergency budget”, Osborne said he’d be borrowing just £37bn in 2014/15, the current financial year. This year we’ll instead be adding over £90bn to our spiraling national debt.

Consider, also, as has come clear since the budget, that the growth uptick, upon which all the other numbers depends, rests on annual net immigration staying well above the Conservatives’ 100,000 annual target, perhaps close to 200,000. Again, that may not happen – particularly if Ukip does well on polling day, after campaigning on tougher immigration controls.

If growth does merely remain steady, with GDP increasing by an annual average of 1.8pc over the next five years as over the last, that puts a cumulative £120bn debt in Osborne’s numbers according to estimates by the respected fund manager Neil Woodford, who argues that “a dose of reality” is needed. “You don’t have to flex these assumptions very much at all, to get a glimpse of a much more difficult fiscal environment,” he says.

There was a bit of pre-election “slack” in this budget, of course – about £900m, in fact, with “giveaway” measures such as higher personal tax allowances slightly outweighing “takeaways” like the lower cap on pension contributions and measures to curb tax evasion and avoidance.

I’d don’t begrudge the Chancellor the small sums he’s targeted at key voters, such as funds to fix church roofs – although some of the money allocated to one-off projects in key Tory and Lib Dem marginals could prove controversial. I also think it was wise to ease the tax burden on North Sea producers at a time when lower oil prices are significantly cutting investment in future production.

I do have issues, though, with the “Help-to-Buy” ISA, which will see the government adding £50 to every £200 first-time buyers put into their tax-free Individual Savings Account. All this will do is further ramp up housing demand, widening the gap with supply. The UK has built under 120,000 houses a year for the last five years, despite widespread agreement our demography dictates some 250,000 are needed. This budget said nothing about housing supply – even though every meaningful UK recovery over the last century has been associated with a significant rise in house-building.

So I’m glad Osborne has maintained his “austerity” rhetoric. But I remain deeply concerned even his limited prudence rests on heroic growth assumptions and that, since he took office, our national debt has almost doubled to £1,600bn – with more than a third of our outstanding gilt stock now held by the Bank of England.

I’m also unimpressed that, yet again, Osborne’s budget failed to tell us, as it has for several years now, where the £30bn of cuts to working-age benefits and public services due by 2017-18 are likely to come from. Such matters, prior to this election, should form part of our national discourse. For what the British public wants most of all is an honest and open debate.

http://www.telegraph.co.uk/finance/economics/11487409/Osbornes-prudence-still-rests-on-heroic-forecasts.html

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