George Osborne used the opportunity of the last Budget before the election to set out his manifesto. The Budget was based on “growth and investment”, he claimed, and he promised an end to austerity towards the end of the next Parliament, defined entirely as a promise to start expanding government spending again by 2019.
The electorate might think that’s a little long to wait. The cuts to departmental budgets (apart from protected areas like health, education and foreign aid) over the next few years will be just as hard as we’ve seen so far, if not harder, and all because the government has had to borrow some £100bn more during this Parliament than it originally envisaged. The deficit, at around 5 per cent of GDP, is still a long way from being eliminated.
There are some positives. Growth has resumed. The chancellor confirmed that, at 2.6 per cent, the UK grew at the fastest rate in the industrialised world last year. And growth for 2015 has been revised slightly upward by the Office for Budget Responsibility (OBR). It’s expected to be 2.5 per cent in 2015, with slightly lower rates of between 2.3 and 2.4 per cent out until 2019. Not a bad achievement, if it were to happen.
Osborne was quick to emphasise the downward risks, mainly in the Eurozone, and he chose to single out the ongoing crisis in Greece as a major worry. World growth and trade have also been downgraded, despite the boost afforded by lower oil prices.
So how is this growth to be achieved? It seems it will all be down to consumers, whose real disposable incomes are finally rising again after a continuous fall during the recession. This, however, is entirely due to lower oil and food prices rather than higher pay rates, as productivity remains moribund.
Osborne hopes to help with a progressive rise in the thresholds for the basic and higher rates of income tax. So more money in the pockets of workers – and also of savers, who will now get a new tax free savings allowance of £1,000 if basic rate taxpayers and £500 if higher rate taxpayers. Pensioners will gain from being taxed less on cashing in their annuities, but Osborne has taken something back by lowering the lifetime pensions limit to £1m. The chancellor is mostly relying on unemployment, now at 5.7 per cent, falling further.
Apart from tax reductions for the North Sea, and the pre-announced review of business rates, the help for business was minimal. In fact, it was all very feeble stuff. There was nothing in the “long-term economic plan”, which Osborne mentioned three times in his speech, about “productivity” or skills.
The real surprise was in the big picture. Lower inflation and slightly faster growth, and the fact that the interest rates at which the state can borrow are much lower than forecast, have helped the government finances – and will continue to do so in the next Parliament. Debt interest servicing costs have been lower than expected, and the government will take advantage of lower interest rates to issue longer-term gilts to lock those rates in. The net result is that government debt is likely to start coming down as a percentage of GDP earlier than expected – falling from 80.4 per cent in 2014-15 to 80.2 per cent in 2015-6. And the deficit turns into a surplus in 2018-19, a year earlier than previously anticipated. But by 2019-20, the surplus envisaged – at £7bn – is lower than earlier estimates of £23bn. Taxes will be higher as tax avoidance is tackled and the levy on banks is raised. Crucially, however, by 2019-20 spending is expected to be some £30bn higher than the Autumn Statement forecast.
Quite a change! This suggests that, politically, the cuts that would have been required were deemed to be either undeliverable or too draconian to be acceptable given the ring-fence around health, education and foreign aid. And even to get to his new forecasts, the chancellor will have to hope that the economy somehow delivers as expected – even though he hasn’t spelt out precisely how it will do so.