The last time the Chancellor got up to make his speech about the public finances back in November, the OBR had published a friendly forecast. Revised calculations meant the Chancellor had more money to spare, which he happily allocated to various spending commitments and tax cuts. At the time it looked like luck that could easily go the other way, and this time it has.
Growth has been revised down. But especially worryingly, this isn’t just a bump in the road, according to the OBR. Instead, the Government’s official forecaster has decided that growth will be permanently lower. For years the OBR thought we were simply in recovery from the financial crisis. Now it thinks we’re permanently stuck at a low rate of growth. What it thought was good news back in November has turned out to be – in its own words – “a false dawn”.
That’s bad news for the public finances, because a smaller economy generates less tax to pay for public services. However, George Osborne hasn’t let that hold him back from hitting his surplus. Instead he has taken “decisive action” to pencil in some cuts in a few years’ time, that will leave him back on track to hit his target to eliminate borrowing. An efficiency review is to be set up to find £3.5 billion of savings.
But even more importantly, according to the OBR, is an effective net tax increase of £6.3 billion in 2019-20, largely due to changes in the timing when firms make corporation tax payments. It is very convenient for hitting the Government’s 2019-20 target, but doesn’t constitute a permanent boost to tax revenues – meaning more cuts will need to be made the year after, in 2020-21.
The hard decisions have been pushed back. In fact, fiscal policy has even been slightly loosened in the short-term, although the effects on the wider economy are small. That doesn’t sound like “decisive action” and it isn’t. But postponing the hard decisions looks like a smarter career move for a Chancellor a few months before an EU Referendum and with a potential promotion on the horizon. He might even be hoping that some hard decisions might never need to be faced. After all, it is only four months since the last forecast, and the numbers have changed by billions. Who knows how his luck could turn in a couple of Budgets’ time – or even in a few months?