A budget at which we can only roll our eyes

@cstreetpartners

A budget at which we can only roll our eyes

GEORGE Osborne delivered his fourth budget statement in just 12 months and it could possibly be his last. That depends on the outcome of the June referendum and the Conservative party’s internal machinations in response. As a result, politics trumped economics as it too often does.

“A budget that puts the next generation first” were the words with which he closed his speech. That generation has a tough challenge to face even if the forecasts are accurate which would, in the world of UK budget predictions, be a new development.

The day opened with Sterling taking a hit as the Office for Budget Responsibility reversed a chunk of the windfall good news they delivered in the Autumn Statement last year by cutting the growth forecasts for the UK economy, and with them tax revenues and the pace of deficit reduction.

The OBR’s task is not an easy one but their forecasts have oscillated wildly over recent weeks not to mention years. This is not entirely their fault as any model is only as good as the data inputted. But the economic underpin to this budget has changed pretty substantially since the Chancellor made his last financial speech to the Commons.

In all budgets the advantage begins with the Chancellor who controls the content, the news agenda in advance, and the framing of the debate. It often takes time for the analysts to get to the nub of the reality of the implications. As a result politics can kick in and many specific measures, like the forecasts they are built upon, can hit the cutting room floor before the year, or even month, is out.

Osborne is unquestionably a talented partisan politician. He missed not one opportunity in his speech to punch home a political point to all the nations and regions he could. But in all times, especially those of the gravity of the moment, businesses and voters prefer a technocrat finance minister to a partisan. Alistair Darling’s strength was that he was this. The reverse reality is George Osborne’s ultimate weakness.

The prize of deficit reduction has disappeared over the horizon with the rhythm of the setting sun. This budget sees a further deterioration.

Borrowing in 2018/19 will rise by £16 billion to £21.4 billion. That one forecast adjustment is costing more than the entire Scottish deficit that dominated political coverage north of the border last week — putting that fury into context.

Over the next three years in total, borrowing is £36.3 billion worse than we were told to expect as recently as last November. How anyone is meant to plan in such a context I do not know. The impact down the food chain on public service management across the country must be chaotic. They are at the sharp end.

Looking ahead, the forecast now has borrowing of £21.4 billion in 2018/19 turning with one flick of the OBR’s unsteady pen to a surplus of £10.4 billion in 2019/20. An overnight (or more accurately over-year) improvement of £30 billion.

Such a turn-around seems so far off that few will scrutinise it. The Prime Minister will be long gone by then and who knows where the Chancellor will be? I wouldn’t be betting the house on it happening if the track record of the last decade is our guide. It will take an unusual spike in productivity to produce it and that improvement should be the core focus of all policymakers away from the noise of debate.

That said while the macro numbers gyrated on a mammoth scale, the financial tinkering was actually, as usual, marginal in its economic impact.

There were 77 decisions with a financial implication for the government finances, 27 spending more money and 50 raising more tax. The net impact of them all is a reduction in funds for the government of £360 million next year (2016/17).

From a macroeconomic perspective this is what economists call a fiscal “loosening” or ‘injection’ of cash back to the economy (from where the government planned to take it).

But in the scheme of the fiscal world this is but a ripple amounting to barely 0.05 per cent of Total Managed Expenditure which is expected to be £772 billion next year.

Corporation tax reducing to 17 per cent in 2010 was headline grabbing, but when you look at the net impact of all nine corporation tax related measures in 2019/20 it produces a grab on company shareholders (for which read pensioners and savers) of nearly £8 billion.

Across the five years of the budget from next year the net impact on companies is a take-out of just over £7.3 billion.

Modest giveaways to income tax payers on the basic allowance, top rate threshold and ISA allowances, and other measures are swamped by the hit on employers.

A senior civil servant once told me that mandarins always said that if we ever levied a sugar tax it would be a sure and certain sign that the world has gone truly mad. The world just went truly mad.

The new Soft Drinks levy is due to cost the drinks industry (and their consumers) £520 million by 2018/19. This was redolent of the pasty tax of 2012 which was rapidly reversed. Whether this one is subject to the same public outcry and political reaction, time will tell.

From a policy perspective the issue is whether government imposed price measures change behaviour or just gouge already hard-pressed consumers who have their own personal choices to make. This debate will rage through spring and summer we do expect. But the Chancellor has just chosen to go to war on some brands that make Greggs and all the other bakers look like small fry. Greggs won the day on that half-baked idea.

Elsewhere, alcohol duty was frozen despite the high sugar content of those products but who expects politicians to be consistent?

Meanwhile UK oil and gas revenues are expected to be a negative £5 billion call on the exchequer in the next five years. A sobering reality for our energy sector and the taxpayer, if only we had saved some of the previous bounty.

One last thing, £10 million over two years for Cathedral repairs. That should secure a few more votes from the clerics in the House of Lords giving the government time to appoint a few more peers of their own.

Every budget has its detail at which we can only roll our eyes. This one had more than most.

Andrew Wilson
Founding Partner