This was Osborne’s fourth budget in a year. This time he had a credibility issue in trying to explain why the economy is now performing so much more badly than was forecast in the Autumn Statement (a budget by another name) just four months ago.
Osborne, like any Chancellor, was keen to blame others: turbulence in the global economy and weaker growth in emerging economies like China being top of the list. But beneath the veneer even Osborne had to admit that the Office for Budget Responsibility (OBR) had revised down growth forecasts because it was now much less optimistic about UK productivity growth.
The OBR has been expecting UK productivity to pick up after several years of pretty dismal performance. It now seems to think that poor productivity growth is here to stay for the foreseeable future, with an impact on the growth potential of the economy. And Osborne can’t blame that on China.
Growth forecasts have been cut every year between now and 2020. Here are the new GDP growth forecasts, alongside ones from just four months ago in the November Autumn statement:
2016: 2.0%, down from 2.4%
2017: 2.2%, down from 2.5%
2018: 2.1%, down from 2.4%
2019: 2.1%, down from 2.3%
2020: 2.1%, down from 2.3%
Lower growth in turn means bigger deficits for the next few years than previously forecast by the OBR. Last November the OBR helped Osborne out when it identified an additional £27bn in revenues that it thought would flow into the government’s coffers by 2020.
But what the OBR giveth can be taken away. And indeed it has, with the OBR forecasting that tax revenues will be lower rather than higher as a result of the poor productivity performance. That £27bn revenue boost has turned into a £56bn black hole.
Robert Chote, the OBR’s director, succinctly noted that for every pound the chancellor found down the back of the sofa in November, he has lost two pounds this time.
So borrowing will be higher than Osborne hoped for. Here are the new deficit figures, again alongside what was predicted in the Autumn Statement four months ago:
2015-2016: £72.2bn, down from £73.5bn
2016-2017: £55.5bn, up from £49.9bn
2017-2018: £38.8bn, up from £24.8bn
2018-2019: £21.4bn, up from £4.6bn
2019-2020: £10.4bn surplus, compared with a £10.1bn surplus
2020-2021: £11bn surplus, compared with a £14.7bn surplus
While Osborne whizzed through these figures in the budget, a quick back of an envelope calculation suggests that Britain will borrow almost £35bn more by 2020 than that expected last November.
Osborne still claims that a surplus is on the horizon for 2019-20, thanks in part to £3.5bn of further spending cuts. But Osborne has had to be pretty imaginative in finding ways to still claim that he is on track to get into surplus by 2020.
On this, the OBR notes that the government plans to:
1. Cut its limit on departmental current spending by £2.3bn (including a £700m cut in overseas aid and £3.5 billion of as-yet unidentified cuts to be generated by an ‘efficiency review’ to report in 2018);
2. Make a £2bn squeeze on public sector pension contributions;
3. Pull forward capital spending to 2017-18 and 2018-19;
4. Implement a net tax increase of £6.3 billion in 2019-20; and
5. Cut welfare spending by £1.4 billion in 2019-20, with further tightening of the disability benefits system.
Without these changes, the OBR reckons that the £10bn surplus Osborne was claiming for 2019-20 would in fact be a deficit of £3bn. This means a pretty severe squeeze in 2019-20.
Osborne has a habit of offering give aways which are ‘paid for’ by tax avoidance measures which don’t quite deliver over time. This time round he announced a raft of reductions in corporation tax, North Sea taxation and business rates (welcome for small firms). He also froze duties on fuel, beer and cider, and increased the personal income tax allowance and the upper-rate threshold.
To pay for this he promised another yet crackdown on tax avoidance, tougher rules on the taxation of multinationals and further (yet to be clarified) Whitehall efficiency savings. But whether these will, over time, actually pay for the give aways Osborne announced in the budget isn’t at all clear.
Indeed, the OBR itself is sceptical, noting that the revenue gains from anti-avoidance and anti-evasion measures are “relatively uncertain.”
And despite Osborne’s best efforts to spin the budget, the key take away point for me is that Britain’s economy looks weaker than just four months ago at November’s autumn statement.
* Professor David Bailey works at the Aston Business School.