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| If Osborne misses his new target, there really is nothing left to cut | If Osborne misses his new target, there really is nothing left to cut |
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| Napoleon would have approved of George Osborne. “I know he’s a good general,” the French emperor once said. “But is he lucky?” | Napoleon would have approved of George Osborne. “I know he’s a good general,” the French emperor once said. “But is he lucky?” |
| The answer to that question, according to the Institute for Fiscal Studies, is yes. The chancellor got lucky when the Office for Budget Responsibility raised its forecasts for tax revenue and cut its predictions for interest payments on the national debt. That gave Osborne some much-needed wiggle room to delay welfare cuts, choke back on austerity and spend a bit more on infrastructure. | The answer to that question, according to the Institute for Fiscal Studies, is yes. The chancellor got lucky when the Office for Budget Responsibility raised its forecasts for tax revenue and cut its predictions for interest payments on the national debt. That gave Osborne some much-needed wiggle room to delay welfare cuts, choke back on austerity and spend a bit more on infrastructure. |
| The question posed by the UK’s leading experts on the public finances is whether Osborne will stay lucky. The chancellor has certainly solved some pressing problems, but he has done so either by pushing pain into the future (as with tax credits) or by pushing the pain on to somebody else (as with local government). | The question posed by the UK’s leading experts on the public finances is whether Osborne will stay lucky. The chancellor has certainly solved some pressing problems, but he has done so either by pushing pain into the future (as with tax credits) or by pushing the pain on to somebody else (as with local government). |
| Related: Labour needs to get stuck in on education | Letters | |
| As the IFS also noted, Osborne is at the mercy of events. The big number bandied about on Wednesday was the extra £27bn of receipts the OBR has put at the chancellor’s disposal. But that is £27bn over five years: the annual increases are small and would quickly be wiped out in the event that the economy under-performs. | As the IFS also noted, Osborne is at the mercy of events. The big number bandied about on Wednesday was the extra £27bn of receipts the OBR has put at the chancellor’s disposal. But that is £27bn over five years: the annual increases are small and would quickly be wiped out in the event that the economy under-performs. |
| This would not have to involve Britain plunging back into recession, although history would suggest a downturn is due some time in the next five years. It would merely involve a year or two of growth at 1.5% rather than the 2.4% and 2.5% the OBR has pencilled in for the next couple of years. | This would not have to involve Britain plunging back into recession, although history would suggest a downturn is due some time in the next five years. It would merely involve a year or two of growth at 1.5% rather than the 2.4% and 2.5% the OBR has pencilled in for the next couple of years. |
| Paul Johnson, the director of the IFS, says this would be a problem for the chancellor. “He has set himself a completely inflexible fiscal target – to have a surplus in 2019-20. This is not like the friendly, flexible target of the last parliament which allowed him to accept a bigger deficit when growth and tax revenues disappointed. This is fixed, four years out.” | Paul Johnson, the director of the IFS, says this would be a problem for the chancellor. “He has set himself a completely inflexible fiscal target – to have a surplus in 2019-20. This is not like the friendly, flexible target of the last parliament which allowed him to accept a bigger deficit when growth and tax revenues disappointed. This is fixed, four years out.” |
| Johnson says that if the OBR has got its projections wrong, Osborne will face a simple choice: abandon the target, cut spending or raise taxes. The IFS director thinks the likeliest outcome would be that the chancellor raises taxes – and the IFS analysis of the autumn statement and spending review shows why. | Johnson says that if the OBR has got its projections wrong, Osborne will face a simple choice: abandon the target, cut spending or raise taxes. The IFS director thinks the likeliest outcome would be that the chancellor raises taxes – and the IFS analysis of the autumn statement and spending review shows why. |
| The extra money found by the OBR has not meant the end of austerity for the public sector. Unprotected departments that are not inside the government’s ringfence are still facing cumulative real-terms cuts of 18% over the course of this parliament. The changes to local government finance are, as Johnson noted, genuinely radical, but will involve winners and losers. The poorest councils have most to fear from reforms that will allow them to keep what they raise from business rates. | The extra money found by the OBR has not meant the end of austerity for the public sector. Unprotected departments that are not inside the government’s ringfence are still facing cumulative real-terms cuts of 18% over the course of this parliament. The changes to local government finance are, as Johnson noted, genuinely radical, but will involve winners and losers. The poorest councils have most to fear from reforms that will allow them to keep what they raise from business rates. |
| Even those parts of the state that have been spared the axe are still finding the going tough, with the settlement for the NHS a case in point. Over the next five years, the health service will see spending rise by 3% in total, which is equivalent to its average annual increase over the past 50 years. Between 2000 and 2008 – a period when Labour was seeking to raise NHS spending to the European average – the increase was 6% a year. | Even those parts of the state that have been spared the axe are still finding the going tough, with the settlement for the NHS a case in point. Over the next five years, the health service will see spending rise by 3% in total, which is equivalent to its average annual increase over the past 50 years. Between 2000 and 2008 – a period when Labour was seeking to raise NHS spending to the European average – the increase was 6% a year. |
| Before the spending review, the Treasury was looking to cut £21bn from the budgets of unprotected departments between 2015-16 and 2019-20, a 27% reduction on average. The savings were necessary because more than half of the budget earmarked for Whitehall was ringfenced. As well as health, preferential treatment was given to schools, international aid and defence. | Before the spending review, the Treasury was looking to cut £21bn from the budgets of unprotected departments between 2015-16 and 2019-20, a 27% reduction on average. The savings were necessary because more than half of the budget earmarked for Whitehall was ringfenced. As well as health, preferential treatment was given to schools, international aid and defence. |
| The extra money Osborne announced in the spending review meant non-protected departments will now have to find £16bn – an 18% cut. That comes on top of bigger cuts in the last parliament. As a result, the budgets for the justice and business departments will both be more than 40% smaller in real terms in 2019-20 than they were in 2010-11. Further cuts look difficult to achieve. | The extra money Osborne announced in the spending review meant non-protected departments will now have to find £16bn – an 18% cut. That comes on top of bigger cuts in the last parliament. As a result, the budgets for the justice and business departments will both be more than 40% smaller in real terms in 2019-20 than they were in 2010-11. Further cuts look difficult to achieve. |
| Much was made of Osborne’s U-turn over tax credits but, as the IFS pointed out, the aim of saving £12bn from the welfare budget remains unchanged. All that has happened is that the pain has been delayed from this year to a later date, until tax credits are subsumed into the new universal credit. | Much was made of Osborne’s U-turn over tax credits but, as the IFS pointed out, the aim of saving £12bn from the welfare budget remains unchanged. All that has happened is that the pain has been delayed from this year to a later date, until tax credits are subsumed into the new universal credit. |
| Indeed, the already substantial losses in store for those on the lowest incomes will be slightly greater as a result of the less generous regime for housing benefit that Osborne announced in the autumn statement. A household in the two poorest deciles will lose 6.5% to 8% of their income as a result of all the changes to the tax system announced since the May election. | Indeed, the already substantial losses in store for those on the lowest incomes will be slightly greater as a result of the less generous regime for housing benefit that Osborne announced in the autumn statement. A household in the two poorest deciles will lose 6.5% to 8% of their income as a result of all the changes to the tax system announced since the May election. |
| When the government first announced universal credit, it said the idea was to make working families on benefits better off while benefits to non-working families would be made less generous in order to improve work incentives. | When the government first announced universal credit, it said the idea was to make working families on benefits better off while benefits to non-working families would be made less generous in order to improve work incentives. |
| Somewhere along the line, that formula has been ditched. The IFS said that on average both working and non-working households would be worse off as a result of universal credit. It estimates that 2.6 million families will be on average £1,600 a year worse off, while 1.9 million families will be better off. This will save the government £1.5bn a year. A further £2.2bn will be saved by cutting spending for non-working families. | Somewhere along the line, that formula has been ditched. The IFS said that on average both working and non-working households would be worse off as a result of universal credit. It estimates that 2.6 million families will be on average £1,600 a year worse off, while 1.9 million families will be better off. This will save the government £1.5bn a year. A further £2.2bn will be saved by cutting spending for non-working families. |
| What does that mean? It means that it would be pretty hard to turn the screw much tighter on Whitehall departments and welfare claimants in the event that the public finances do not live up to the rosy OBR expectations. The fact that the Treasury has started pushing back against the IFS analysis of the winners and losers from universal credit speaks volumes. | What does that mean? It means that it would be pretty hard to turn the screw much tighter on Whitehall departments and welfare claimants in the event that the public finances do not live up to the rosy OBR expectations. The fact that the Treasury has started pushing back against the IFS analysis of the winners and losers from universal credit speaks volumes. |
| Related: Autumn statement: IFS warns on tax rises and spending cuts | Related: Autumn statement: IFS warns on tax rises and spending cuts |
| It is, of course, possible that the OBR has got its judgment right, or that things might turn out even better. Over the course of repeated economic cycles, the public finances have tended to disappoint during recessions and outperform during booms. The last two chancellors to have put Britain’s public finances back in the black – Nigel Lawson in the late 1980s and Gordon Brown in the late 1990s – both benefited from this tendency. | It is, of course, possible that the OBR has got its judgment right, or that things might turn out even better. Over the course of repeated economic cycles, the public finances have tended to disappoint during recessions and outperform during booms. The last two chancellors to have put Britain’s public finances back in the black – Nigel Lawson in the late 1980s and Gordon Brown in the late 1990s – both benefited from this tendency. |
| But the pattern has been broken since the turn of the millennium. In his later years at the Treasury, Brown found that tax receipts never quite matched his expectations. Similarly, Osborne’s failure to meet his deficit reduction target since 2010 has been due to growth being less tax-rich than forecast. | But the pattern has been broken since the turn of the millennium. In his later years at the Treasury, Brown found that tax receipts never quite matched his expectations. Similarly, Osborne’s failure to meet his deficit reduction target since 2010 has been due to growth being less tax-rich than forecast. |
| Johnson says growth will either be higher or lower than the OBR is predicting. “The forecasts will change again. That much I am sure of. I just don’t know which way they will change.” The IFS director says Osborne has a 50-50 chance of staying lucky. | Johnson says growth will either be higher or lower than the OBR is predicting. “The forecasts will change again. That much I am sure of. I just don’t know which way they will change.” The IFS director says Osborne has a 50-50 chance of staying lucky. |
| If the chancellor ceases to be blessed by good fortune, Osborne’s first line of defence would be to reduce the size of the surplus from £10bn closer to zero. But it would not take that much of a growth undershoot to wipe out the surplus altogether. In those circumstances, the search would be on for some stealth taxes to raise. | If the chancellor ceases to be blessed by good fortune, Osborne’s first line of defence would be to reduce the size of the surplus from £10bn closer to zero. But it would not take that much of a growth undershoot to wipe out the surplus altogether. In those circumstances, the search would be on for some stealth taxes to raise. |