Economists have accused George Osborne of ducking tough decisions on deficit reduction in favour of generous giveaways in yesterday’s Budget.
Growth and productivity forecasts were downgraded, leaving a gaping hole in the Treasury’s balance sheet – but Osborne was not deterred from handing out tax cuts for workers, savers, small businesses and energy companies.
There were some belt-tightening measures, including an attention-grabbing new tax on fizzy drinks. Nonetheless, the chancellor’s grip on the public purse was looser than expected; over half a million people will be taken out of the 40p tax bracket, while 600,000 small companies will be relieved from paying business rates.
Business groups welcomed several of the measures, but some analysts warned that trouble lies ahead.
Osborne has now broken two of his three fiscal rules, exceeding the so-called welfare cap and failing to consistently lower the ratio of debt to GDP.
His chances of meeting the third rule – to run a surplus by 2020 – are hanging by a thread.
“The chancellor says he has taken ‘decisive action’ in the face of the OBR’s gloom over the economy and the public finances,” said economist Nida Broughton from the Social Market Foundation. “In reality he is postponing the hard decisions over where savings are to be made until the end of the Parliament in 2019 and 2020.”
Osborne insisted that the government is on track to meet its target of achieving a fiscal surplus of more than £10bn by the end of the decade, yet credit rating agency Moody’s described this as “more of a statement of intent rather than a realistic forecast”.
“Higher deficits in each of the coming years lead to a higher than expected public debt ratio and further delays in reversing the rising debt trajectory, which is a key consideration in our sovereign credit analysis,” it added.
The government’s fiscal watchdog, the Office for Budget Responsibility, thinks the probability of Osborne eliminating the deficit is “only slightly above 50 per cent”.
Institute of Chartered Accountants in England and Wales chief executive Michael Izza was even more pessimistic, saying: “On the back of this budget, eliminating the deficit looks increasingly like a three parliament problem.”
Henderson’s chief economist Simon Ward agreed, saying: “The reality is that his forecast numbers rely on accounting tricks, unspecified future spending reductions and more stealth taxes. There is still a gaping hole in the UK’s fiscal roof.”