GEORGE Osborne yesterday set out on the path towards the deepest spending cuts in over a generation, announcing immediate action to cut the deficit followed by an emergency Budget in six weeks time.
Next Monday, the chancellor will provide details on how he intends to cut £6bn of spending this year; he will then deliver his emergency Budget to the House of Commons on 22 June; and he will kick off a comprehensive spending review in the summer, which is sure to pave the way for swingeing reductions in public expenditure.
It was Liberal Democrat chief secretary to the Treasury David Laws that yesterday confirmed the government would make £6bn of savings this year, in a symbolic gesture to show his party is now fully committed to early cuts. In opposition, Vince Cable, now business secretary, described Tory plans for an early fiscal tightening as “economic masochism”.
Laws said: “To be frank, the circumstances in the markets over the last few months have led to real concern that the contagion in Europe could spread to these shores if we fail to take early credible action.”
Meanwhile, Osborne said he was “changing the way Budgets are made forever” as he announced the creation of a new Office for Budget Responsibility (OBR), which will provide independent growth and borrowing forecasts.
“I’m the first chancellor to remove the temptation to fiddle the forecasts. I’m creating a rod for my own back, and for other chancellors down the line. From now on, we’ll fix the Budget to fit the figures – not fix the figures to fit the Budget,” Osborne said.
The OBR will be headed up by Sir Alan Budd in the interim, with a new chief being recruited when the government legislates to give the body statutory powers.
The OBR will also pass judgement on whether the chancellor’s tax and spending decisions give him a fighting – or more than 50 per cent – chance of achieving his Budget’s aim.
SIR ALAN BUDD
INTERIM HEAD OF OFFICE FOR BUDGET RESPONSIBILITY
A founding member of the Monetary Policy Committee, launched in 1997, the 72-year-old Sir Alan Budd has a penchant for fiscal firsts. Yesterday, he described his role setting up and heading the OBR as “the most exciting challenge” of his professional life. Before his stint on the MPC, he was chief economic adviser to the Treasury between 1991 and 1997. He also wrote an independent report that precipitated former home secretary David Blunkett’s resignation. Budd is expected to hand the OBR reins over to a permanent head when the body becomes statutory. In the interim, Budd will be assisted by Geoffrey Dicks, chief economist at Novus Capital, and Graham Parker, former head of the Treasury’s public sector finances team.
Q&A: OFFICE FOR BUDGET RESPONSIBILITY
Q. HAVE CHANCELLORS BEEN FIDDLING THE FORECASTS?
A. Although chancellors take soundings from Treasury officials, they have the final say when it comes to the borrowing and growth forecasts that are printed in the Budget. That means they can forecast higher growth and lower borrowing to avoid tough decisions on public spending. The evidence would appear to suggest the temptation has proven too much. Since 2000, most borrowing estimates have undershot the actual amount. In 2003, the two year forecast was 15.8 per cent lower than outturn; in 2007 the two year forecast underestimated borrowing by 66.6 per cent; and in 2008, the difference was 125.1 per cent (mostly due to the unforeseen banking crisis). Forecasts for the trend – or long-term – rate of growth have also been too high, encouraging chancellors to be too optimistic about future tax revenues.
Q. WILL AN OFFICE FOR BUDGET RESPONSIBILITY HELP?
A. From now on, the chancellor won’t write his own forecasts. That will be done by an independent Office for Budget Responsibility (OBR). Once the body has become statutory, the chancellor will have to print its figures in his Budget, meaning no more fiddling.
Q. WHAT’S THE POINT OF THE CHANCELLOR THEN?
A. The chancellor will still take all tax and spend decisions. But the OBR will pass judgement on whether or not he has a 50 per cent or greater chance of meeting his aim (e.g. eliminating the bulk of the structural deficit over four years). The chancellor doesn’t have to change tax and spend plans if the body casts doubt on the chances of meeting the fiscal mandate, but it would be a brave chancellor that ignored the OBR.
Q. SO ALL THE FORECASTS WILL BE PERFECT FROM NOW ON?
A. Far from it. Because measuring the output gap is so difficult, accurate forecasting is fraught with uncertainty. All the OBR does is remove political interference.