A Budget departed from reality
The last budget of the coalition did not substantially change the economic policy debate ahead of the election. It did provide yet another example of how that debate departs from reality. The budget avoided addressing the key challenges for the British economy. It was ultimately therefore a depressing statement which underlined the lack of faith both Conservatives and Liberal Democrats have in the future of our economy. The numbers do contain good news for Labour, but the battle is more about politics than economics.
Accompanying the budget was the latest economic and fiscal outlook published by the Office for Budget Responsibility. Here, we once again entered into OBR world. In this world, the coalition government continues to exist for another five years, spending continues to be cut, and the government meets both its old and new fiscal targets. Yet none of this will happen as the OBR describes. The OBR is sceptical too, since it stressed in its report that it confirmed that spending projections had been signed off by the ‘Quad’ of David Cameron, George Osborne, Nick Clegg, and Danny Alexander yet noted each party wanted to pursue different policies.Future historians might wonder why we were all so accepting of such a farce.
The reality is that this government has missed its fiscal targets. The only way it can claim to have the finances on track and get an endorsement from the OBR is to invent some figures for spending cuts. The new fiscal target requires the government to balance the cyclically adjusted current budget within three years on a rolling basis, which is much tighter than the previous five year target (though there is no economic reason why the target should have been changed). In effect, the chancellor has said to the OBR, ‘Imagine we cut spending so we can meet the target, even though we won’t say where, will we hit the target?’ To which the OBR has replied that of course they will and has added mildly for our benefit that this implies:
‘a sharp acceleration in the pace of implied real cuts to day-to-day spending on public services and administration in 2016-17 and 2017-18 … the implied cuts in 2016-17 and 2017-18 are a key reason why the government is on course to achieve its new fiscal mandate to balance the cyclically adjusted current budget in 2017-18 with room to spare.’
The cynical character of this budget was further demonstrated by the projections of a boost to spending in the final year of the next parliament. In December, the OBR highlighted that coaltion plans would reduce the size of the state as a proportion of GDP to the levels of the late 1930s. Labour quite rightly ran with this since Osborne was vulnerable to the claim that he was being unnecessarily stringent. Yet the politics of public finances have been such that the government has stressed austerity and then apparently relaxed its stance while still projecting cuts.
In the budget, the government projects spending to suddenly increase substantially in 2019-20. This is because spending was assumed to rise in line with inflation across the economy but now is assumed to rise in line with nominal GDP. The boost to spending means overall the state does not shrink as much as previously forecast.However there is no policy reason given why spending should be cut so fast in earlier years and then suddenly increased.
It is worth noting that lower inflation and lower bond yields have prompted the OBR to revise up its departmental spending projections compared to its last report. This is because beyond 2015-16 the Treasury gives the OBR a projection for total spending. The OBR works out what will happen to regular spending, such as welfare and paying interest on debt, according to its own forecasts. The difference between the two is what government spends through departments. The fall in oil prices has lowered inflation, which will reduce benefit payments, and the fall in bond yields means the government can finance new debt at a lower cost. The net result is that ‘annually managed expenditure’ falls and implied departmental spending, including on investment, rises. However, this is in the context of severe spending cuts either way.
The Conservatives claim they will limit cuts to departmental spending by cutting £12bn from benefits. However, they have provided no details of where cuts in either area will take place. The IFS believes they would need to cut more departmental spending than Osborne claims. Of greater concern is that there is was nothing in the budget to significantly boost long term prosperity nor rapidly deal with the housing crisis. Household debt as a proportion of income is still forecast to rise above pre financial crisis levels, indicating that the OBR expects little fundamental change to the economy. The lack of ambition for the past five years could damage a generation.
The latest figures provide some assurance for Labour. The Institute for Fiscal Studies notes that ‘our latest estimates suggest that Labour would be able to meet its fiscal targets with no cuts at all after 2015-16.’ Indeed, it may be able to increase departmental spending. Labour’s fiscal targets are credible. The focus will be on convincing people that is the case. That means that we will need to continue to demonstrate discipline on spending commitments. We should also take advantage of the additional room for investment, as part of a manifesto committing government to investing in the future of every citizen.
This article was first published by Progress on 19 March 2015.