This was not a giveaway Budget, however. The measures were fiscally neutral and the chancellor’s main message was that the government remains on course to get the public finances in order. Public debt as a share of GDP has been stabilised a year earlier than predicted and (as originally promised) before the end of this Parliament. This was achieved mainly by the sale of £9bn of Lloyds shares and other bank assets nationalised during the crisis.
The use of asset sales to hit a debt target was a clever political wheeze. But much more interesting were the figures showing that the public borrowing forecasts are now lower (compared with the Autumn Statement) in every year until 2018-19.
An improvement in the public finances so close to the election may look suspicious. But the forecast comes from the independent Office for Budget Responsibility (OBR), and there are good reasons to suspect that it may actually have underestimated the extent of the coming fall in public borrowing.
George Osborne has not, on the whole, been a very lucky chancellor. He has presided over an extraordinary period, exceptional in post-war history, during which prices have grown faster than wages. The negative effect on real living standards has been much discussed. The negative effect on the public finances is less widely understood. It is worth examining.
At the start of this “Great Recession”, the sterling exchange rate fell very sharply, driving up import prices and pushing inflation briefly above the Bank of England target. At the same time, the collapse in demand, and hence corporate profits, made companies reluctant to grant wage increases.
These developments worsened the public finances because higher prices pushed up the cost of public spending, while income tax revenues, which follow wages, were much less buoyant.
The recession had another important effect. In the early years, private wages fell sharply relative to public sector wages, again worsening the deficit because the tax receipts, on income and expenditure generated by the private sector, fell relative to the cost of employing public servants.
The recession was followed by a long period of stagnation and falling real wages. But the tide is now turning. Real living standards, as measured by real household disposable income per capita will, according to the OBR, finally rise above their 2010 level this year.
As the upswing gathers pace, the rise in real incomes will accelerate. It will be led by private sector wages, which tend to grow more rapidly than public sector wages in the upswing (just as they fell more rapidly in the early stages of the downswing). These are the fundamental reasons why the public finances might improve faster than expected in the years ahead.