CHANCELLOR George Osborne yesterday lived up to his promise of an austerity Budget and announced sweeping tax hikes and spending cuts to regain control of the spiralling public finances.
According to the independent Office for Budget Responsibility (OBR), the measures outlined yesterday should see public sector net borrowing fall from £149bn in 2010-11 to £89bn by 2012-13, £37 in 2014-15 and £20bn by 2015-16.
As a share of GDP, net government borrowing will be 10.1 per cent this year, less than was estimated in both the March 2010 Budget and the OBR’s pre-Budget release last week. It will fall every year to reach 1.1 per cent by 2015-16, the end of the forecast period. Consequently net debt will peak at 70.3 per cent in 2013-14. Gross debt on a Maastricht basis will peak at 85.5 per cent in 2012-13, well below the the 100 per cent level that Standard & Poor’s had previously cited as ringing alarm bells over the UK’s coveted triple-A rating.
On the structural current deficit measure, the fiscal shortfall will be 4.8 per cent this
year falling to 0.7 per cent by 2013-14. In 2014-15 and 2015-16, the OBR predicts that we will have a structural current budget surplus of 0.3 per cent and then 0.8 per cent.
The balance of the fiscal tightening was, as had been indicated prior to yesterday, in
favour of spending cuts, with only 23 per cent of the squeeze coming from tax hikes.
Departmental expenditure limits (DELs) will be slashed further by the Liberal-Conservative government. An extra £17bn will be wiped off department budgets by 2014-15.
However, the NHS will still receive real increases in its budget throughout the parliament and Overseas Development Assistance (ODA) will be protected at 0.7 per cent of GDP.
Non-protected departments will face swingeing cuts of 25 per cent in real terms over the four years. But the axe will not fall uniformly. “Not all departments will receive the same settlement. I recognise, for example, the particular pressures on our education system and on defence,” said Osborne. Final departmental settlements, and the final split between departmental expenditure and annually managed expenditure on welfare, will be set in the spending review, scheduled for 20 October 2010.
City economists described the Budget as both aggressive and ambitious but broadly welcomed the step to restore some much-needed credibility to the public finances.
“What they are aiming for is quite ambitious,” says Hetal Mehta, senior economic adviser to the E&Y Item Club. But she warned that £40bn worth of tightening by 2014-15 may be testing the limits of acceptability, at least in the public’s view.
Economists also expressed scepticism about the OBR’s growth forecasts. Charles Davis, senior economist at the Centre for Economic and Business Research (cebr), said: “We think the OBR’s projections for growth are still on the high side. We see a weaker consumer recovery and more risks to the export-led recovery than the OBR.”
He added: “The fiscal tightening means growth in demand will be weakened, so we
expect the Bank of England to keep interest rates lower for longer – on hold at 0.5 per cent into 2012.”
Particularly important was the cautious welcome that the ratings agencies gave the Budget. Fitch said yesterday: “Ambitious tax rises and spending cuts unveiled by Britain’s new government should strengthen confidence in its AAA rating.” But it also cautioned that securing these measures on the scale proposed may be a challenge.