Duncan’s Economic Blog

The Politics of Three Budget Scenarios

Posted in Uncategorized by duncanseconomicblog on March 21, 2011

There’s an excellent article (paywall) in the FT today on how the OBR forecasts might change at the Budget.

Perhaps the key line is that “despite disappointing growth, tax revenues are stronger than expected, leaving 2010-11 borrowing likely to be closer to £140bn than the £148.5bn predicted in November.”

Growth is looking to be weaker than expected, but tax revenues are stronger than expected.

The two key calls from the OBR are going to be –

(i) Does it conclude that the recent weakness in growth is temporary or does it downgrade growth estimates for 2011, 2012 and 2013?

And

(ii) How much of the increased strength in revenues does it forecast to continue?

So we have three possible scenarios:

(1) As the FT notes the best case for Osborne would be for the OBR to conclude that the weakness in growth won’t last, but that the improved flow of tax receipts will. In that case the borrowing forecasts would suddenly look a lot lower, giving Osborne room for manoeuvre with tax cuts and other giveaways in 2013 and 2014.

(2) If, on the other hand, the OBR concluded that growth was going to be weaker and that the increase in revenues was temporary – then Osborne would be in trouble, suddenly his deficit reduction plans would require a great deal more tightening to achieve.

(3) So maybe what we should expect is the compromise option – the OBR could conclude that the weakness in growth will last, but that tax receipts will be stronger than expected – so we get lower growth but the deficit reduction plan is largely unaffected.

It’s worth thinking for a moment about the politics of these three outcomes.

Obviously the first would be a boon for Osborne and real problem for Labour – the OBR would both be vindicating his current approach and offering the chance for pre-election giveaways. The one upshot for Labour would be that if the OBR radically revised down borrowing forecasts there would be a stronger case for arguing that the pace of reduction was a political choice and a firm case for arguing for slowing the pace of spending cuts.

The second scenario would be a disaster for Osborne, and indeed the economy. Lashed to the mast of deficit reduction by his own rhetoric, he would presumably react by announcing further tightening.

The third scenario, possibly the most likely, is also the most interesting. Osborne would claim that his plans were intact despite ‘difficult world conditions’ (Libya, Oil, Japan, Eurocrisis) and seek to focus on the question of the deficit alone.

Labour would presumably respond that his growth forecast (and hence his employment forecast) had been cut and to talk mainly of ‘growth and jobs’.

In effect the two parties would both be claiming a victory and talking at cross purposes – Labour on the state of the real economy, Osborne on the structural deficit.

In the medium term it would come down to a question of what the public found more convincing and relevant to their lives – Labour’s message that Osborne has cut growth and increased unemployment or the Government’s line that they had dealt with a budget mess ‘inherited from Labour’.

Of course underlying all of this deabte is a fact that risks getting missed entirely from the public debate – tax receipts are outperforming despite weaker than expected growth. Surely this suggests that Labour’s plans (which rely more on tax than spending cuts) are more likely to succeed in closing the deficit than Osborne’s?

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