Plan A is sunk. Plan B looks leaky. Will Osborne get to launch Plan C?
David Bailey feels that George Osborne managed to pull a political rabbit out of his rather threadbare Autumn Statement hat yesterday but wonders "will it be enough"? and "whatever happened to rebalancing the economy"?
As Information Daily readers will be aware, the package of measures that the Chancellor unveiled just a few months before the next General Election actually amounted to a “tightening” of the public finances rather than the giveaway he had hoped to deliver.
That’s because Osborne’s deficit reduction plan is way off track. Back in June 2010, just after the election and before the Chancellor’s ‘emergency’ Budget, government borrowing for this financial year (2014-15) was forecast to be £70 billion.
The Chancellor’s plan (Plan A) was to reduce that 2014-15 borrowing figure to £37 billion and to eliminate the structural deficit (that’s the bit of the deficit which doesn’t go away after a recession) by May of next year – just in time for the next election.
Four years on, and Osborne’s deficit-reduction plan has gone badly awry. Indeed, Osborne confirmed in the Autumn Statement that government borrowing in 2014-15 will come in at around £91.3bn. In fact, the deficit is 6% higher in the first seven months of the current financial year than it was in 2013-14.
Of course, there may still be bumper tax receipts in January when the self-assessment returns pile in, which could help Osborne hit his new revised targets (Plan B) for 2014-15. Nevertheless, even if there is a big tax-take in January, Osborne will still be way off the Plan A track.
That’s for two main reasons.
Firstly, over the life of this Parliament, Osborne hasn’t delivered enough growth, and that lack of growth in turn dented Osborne’s own deficit reduction plan. Remember that Osborne front-loaded cuts for political reasons, hoping to create room for giveaways around now. But in so doing he ignored how frail the economy was at the time, and effectively snuffed out growth for two years.
Secondly, the recovery has been good at creating jobs, but not very well paid jobs, so tax receipts are falling well short of what the government hoped for. In other words, low pay isn’t just an equity issue; it affects the government’s coffers as well.
Osborne sought to deflect attention by pointing to the forecast by the Office for Budget Responsibility (OBR) that Britain would have a budget surplus by 2018-19, the same date as that predicted back in his March budget. He described the outlook as “Britain back living within its means. Our long-term economic plan on course.”
But he had to admit that “while the deficit is falling it remains too high.” Just before the 2015 General Election, that’s not exactly a great place for him to be in.
Of course, Osborne repeated his line that the UK will outpace other advanced economies this year, and that GDP would grow by 3% in 2014 according to the Office for Budget Responsibility (OBR). That’s higher than the forecast made by the OBR back in March. Osborne was able to boast that “today, against a difficult global backdrop, I can report higher growth, lower unemployment, falling inflation and a falling deficit.”
However, forecasts for the years ahead show UK growth losing steam. GDP is expected to rise 2.4% in 2015, 2.2% in 2016 and 2.4% in 2017, with the Chancellor stating that “the warning lights are flashing over the global economy” and that Britain should not expect to be immune to the fallout.
In terms of specifics, Osborne announced a much anticipated “Google Tax”, to try to ensure a “fair share” of tax is paid by banks and big multinational businesses. Aimed particularly at tech firms, the measure involves a “25% tax on profits generated by multinationals from economic activity here in the UK which they then shift out of the country.”
Also, he announced the abolition of air passenger duty for children under 12 next year, the setting up a new children’s television credit, and an offer of help to small retailers struggling with online competition.
He had of course announced a number of measures in the run-up to yesterday’s speech such as more funds for the NHS, a garden city, more spending on infrastructure and flood defences, and – supposedly - loans for small businesses.
The latter lacked any credibility, however. Bank lending to SMEs fell by £719m in the first quarter of this year, £435m in the second quarter, and £128m in the third quarter. So far, Funding for Lending (FLS) has completely failed to increase net lending to small businesses, despite lenders drawing nearly £48bn from the scheme.
Bizarrely, the scheme focuses on gross rather than net lending, so banks can effectively take the money, lend it out to firms while calling in other loans. The net effect can be negative while the banks get bailed out again. The policy is a failure, and should really be called ‘funding for bankers’.
Remember that funding for lending was meant to help small firms but was instead used to kick start the housing market. That was further turbo-boosted by ‘Help to Buy’ (or ‘help to buy votes’ as I like to call it).
And that’s where Osborne’s most eye-catching measure came in yesterday, in yet another boost for the housing market. It’s no surprise; in recent months the property market has been showing signs of flagging, so ahead of the election Osborne has had to come up with a plan to pump the market back up.
This time he announced that stamp duty will be cut for 98% of people who pay it and that only the highest value residential properties will pay more. Estate agents were no doubt left salivating on the news.
The irony is that having talked the talk on rebalancing, the government has again resorted to its old trick of stimulating the housing market to get confidence moving, and with it consumer borrowing and spending. Quite how sustainable will this all be? I’m sceptical.
The whole exercise will probably be remembered as a political masterclass in how to make the most from nothing. We’ve had four days of positive headlines about extra money for the NHS (which turned out not to be extra money but re-used ‘underspend’) plus announcements on infrastructure, followed by yesterday’s stamp duty rabbit.
But that doesn’t hide the fact that Osborne had hoped that by now living standards would be rising and public finances strong enough to dole out tax cuts, all served up as a tasty appetiser for the main course after the General Election.
But that hasn’t happened. Of course, Osborne still hopes that the government’s opinion poll lead on economic competence will still be a winner come election day. But really all he can do now is claim that the economy will be fine unless ‘the other lot’ get in.
That may or may not be enough to convince voters, especially as Labour will echo Ronald Reagan’s classic question to voters: “Are you better off now than you were four years ago?”
Shadow Chancellor Ed Balls has already pointed out that for all Osborne’s promise of imminent prosperity, the OBR is still forecasting that real wages will have fallen by 4% over this parliament - meaning that people will be worse off in 2015 than when David Cameron came to office in 2010.
How people feel on Ronald Reagan’s big question may have quite an impact on the outcome of the next election.
The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of The Information Daily, its parent company or any associated businesses.
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