While the Treasury moved quickly after the Budget speech to clarify that students will not be forced to study maths until they reach 18, when it comes to the economy George Osborne’s address left many questioning his sums.
The ‘sunshine Chancellor’ has promised to return public finances to the black by the end of this parliament – a claim which has come under intense scrutiny from experts, particularly following a Budget which showed a marked shift in tone, from mending the roof to ‘storm clouds gathering’.
Osborne has failed to meet two of his three self-imposed fiscal targets (see below), and has been accused by economists of using a range of accounting devices to disguise a £56bn ‘black hole’ in the government’s finances.
So how have things gone from sunshine to storm clouds? And will the Chancellor deliver his promised surplus by the end of the decade?
According to the Bank of England growth is cooling; the headline rate has dropped from the predicted 2.5% to 2.2%. Osborne also revealed that the Office for Budget Responsibility – the body created in 2010 to deliver independent forecasts for the economy and public finance – has downgraded its forecast for GDP growth to 2% this year and 2.2% in 2017, down from the heady days of last year’s Autumn Statement when growth of 2.4% was predicted.
For the meteorologically-minded Chancellor, it might have been better if the OBR had taken a ‘steady as she goes’ approach to the Autumn Statement forecasts, rather than packed for good weather in the hope it turns out nice.
When faced with having to explain these gloomy figures, the Chancellor pulled out his bumper book of weather metaphors and blamed external “headwinds” such as the slowdown in the Chinese economy, falling oil prices and uncertainty around the EU. The outlook for the global economy is “materially weaker”, with the UK not immune to such downturns.
But in spite of the gloomy forecast Osborne still found time to raise income tax thresholds, slash business rates and corporation tax and fund infrastructure projects – moves which had economists reaching for the calculator.
Osborne’s plans were met with scepticism by both the Institute for Fiscal Studies and the OBR. Paul Johnson from IFAS told the BBC’s Today Programme that the Chancellor had a “50-50 shot” of reaching his target, but a further downgrading of the public finances would mean more “proper” tax rises or spending cuts.
OBR director Robert Chote said that although Osborne was “meeting the letter” of his self-imposed budget surplus rule the ‘giveaways’ averaging £6bn in 2017-18 and 2018-19 would then be followed by ‘takeaways’ averaging £13bn in the two years afterwards.
Chote stated that the weaker than predicted outlook had punctured a £56bn hole in the public finances over the next five years. “The sofa has swallowed roughly two pounds this time for every one that it yielded last time,” Chote said, alluding to the £27bn improvement given to Osborne in the Autumn Statement.
The Office for National Statistics has also revised down the nominal GDP by £18bn, reducing the tax base and weakening public finances.
So how will the Chancellor meet the only fiscal target he has left?
- According to think tank the Resolution Foundation, he will have to borrow £38bn more over the next three years
- Big business will also have to pick up more of the tab. The Red Book states that in 2019-2020, business tax payments will increase rapidly. The Treasury predicts that changing the timing of corporation tax payments will bring in nearly £6bn by the end of this parliament, with the restrictions on corporation tax relief bringing in nearly £1bn and commercial stamp duty reform £560m
- The spending cuts to unprotected government departments of £3.5bn will also kick in
- Finally, the Treasury is banking on lower debt interest payments to get them over the line in 2020
While the outlook may look sunny for George Osborne, all of the above are just forecasts, and if a downturn similar to last year’s Autumn Statement rolls in the Chancellor may need more than an umbrella (or an umbrella company tax) to save his political career.