The Fiscal Arithmetic Looks Bad for Osborne
Hopi has very good post up on what George Osborne will do next. I recommend having a look if you haven’t already.
This post follows from that and is based on a comment I had over there.
As Hopi says:
My suspicion is that George Osborne was always planning to use the Budget to announce his “growth agenda”. If I were in the Treasury, I’d have noted that until Q3 the economic numbers were pretty good, and the PSNB numbers were below projection. I’d figure that growth was likely to continue in Q4 and I could launch my 2011 Budget in March claiming to have fixed the crisis, and that now was the time to put the priority on laying the foundations for a sustainable future economy.
In other words, I’d claim to have fixed the deficit and stabilised the economy, reaped a small reward for that in terms of lower debt and debt repayments and propose to put that extra funding into Business side growth drivers.
This line – ‘I’ve done the hard work now lets talk about a growth’ – seems to fit with what Osborne has expecting. It’s similar to the line he took in a recent FT piece addressed to European Finance Ministers, which now comes across as arrogant and complacent.
The problem is he seems to have overestimated the strength of the recovery.
Hopi is no doubt right that Labour should keep attacking his lack of a growth plan. (As an aside I am rather pleased, 4 months on, with this old post on how Labour should keep the 4 year plan, attack the lack of a Plan B and await economic developments).
But what’s worrying me now is the fiscal arithmetic.
Between April and December 2010 public sector borrowing came in at £118.4bn as against £126.8bn in 09/10.
The June Budget forecast for total borrowing of £149bn in 2010/11 may now well be missed. The horrible December suffered by retailers combined with a generally bad Q4 for the all important service sector suggest to me that January’s corporation tax receipts will be on the light side.
The poor state of the economy at the end of 2010 makes a downgrade to the 2011 and 2012 growth forecasts from the OBR increasingly likely.
A miss (even a small one) in the 2010/11 borrowing forecast would be bad enough for Osborne, but revising down 2011 and 2012 means the OBR will be forced to revise up welfare payments (again) and revise down tax revenues.
How will Osborne react?
After the release of the November public sector borrowing figures (which were awful) I speculated that we might have to start preparing for Emergency Budget II.
With Danny Alexander reaffirming the Coalition’s commitment to cuts in this morning’s FT, and with last week’s declaration that there is no plan B, one has to start to worry about next March’s budget. They’ve lashed themselves to the mast of deficit reduction through spending cuts, and even if it patently fails they’ll find it hard to back down. If the medicine isn’t working they’ll simply double the dose
We only have to look across the Irish Sea to see how this ends.
In December 2009 Irish Finance Minister Brian Lenihan said that Budget 2010 was ‘the last big push’ of this economic crisis, adding that ‘the worst is over’. It didn’t work, the deficit continued to rise as fiscal policy depressed the economy. One year later an even more savage budget followed.
Will next year’s budget be even more savage than the Emergency Budget/CSR? I’m starting to worry that it might be.
In other words, just as Osborne should be announcing a growth plan he may be forced to announce further cuts. We’ll have a better picture once we get the January borrowing figures and our first look at the January economic data, but early indicators (such as consumer confidence) aren’t looking good.
The possibility of further cuts hasn’t really entered the mainstream debate yet, despite Paul Mason flagging this up earlier in the week.
It will not be long before somebody points out that, if the 0.5 contraction is consolidated into the 2011-12 growth projections, then the Budget might have to be more austere than expected.
The March Budget is going to be very interesting – Osborne needs to announce a growth plan, but his tough earlier rhetoric might mean he instead announces yet more austerity. I suspect we’ll get both – some poorly cobbled together ‘growth plan’, probably made up of a small regional growth fund and some deregulation together with more public sector cuts – probably focussed on welfare.