OBR gives early Christmas present to Osborne
There was a moment during the Chancellor’s Autumn Statement when the twittersphere was in almost complete meltdown. Given the softening of cuts, the complete abandonment of cuts to tax credits and the level of spending, many commentators were suggesting that George Osborne had undergone some kind of Keynesian conversion.
Others suggested this ‘mini giveaway budget’ might mean that the long-forecast Conservative Party leadership election would be sooner than we all thought.
However, it soon became clear where the Chancellor had found the additional cash that would apparently allow him to stick to his self-imposed targets while delivering the £4.4bn a year cost of his tax credit U-turn, and making around £8bn a year less than expected in government departmental savings.
Analysis from the OBR showed unexpected improvement in the forecast for the country’s finances giving Osborne more room for manoeuvre; £23bn more room.
The general economic picture from the OBR saw a hefty rise in forecast tax revenues, a fall in interest costs and money raised from the apprentices levy.
The rise in forecast tax revenues, the re-evaluation of housing association debt, the fall in interest costs and money generated from increasing stamp duty and the new apprentice levy allowed the Chancellor to soften the blow of departmental cuts, while apparently remaining on course to turn this year's £74bn deficit into a £10bn surplus in 2020.
This led many commentators to label Osborne a lucky Chancellor, and outgoing BBC economics editor Robert Peston commented that the Chancellor has been: “bailed out by OBR forecast of higher tax revenues and lower interest costs”.
However, while the OBR’s early Christmas present to George Osborne has allowed the Chancellor to spend an unexpected windfall while wiping out the deficit, forecasts have been known to be wrong. Indeed, this morning Paul Johnson, Director of the IFS, described the revised forecast as a "silly number".
Should tax revenues come in lower and interest payments higher than he has based his plans on, Osborne will struggle to pin the blame on a forecasting agency he helped to create. He may have to rely on the public forgetting about his time as Shadow Chancellor, vehemently criticising Gordon Brown and Ed Balls for their unsustainable spending.
Thanks to the OBR, however, Osborne’s Keynsian conversion will have to wait until another day.