Why can’t politicians learn to tell it as it is?
George Osborne is often accused of
cowardice and a lack of radicalism. He needs to be much bolder if he is
ever to get to grips with the public finances, critics say Photo: Julian Simmonds
With each passing Budget, the full horror of Britain’s economic predicament
becomes steadily more apparent, yet like a stuck record, the message is
still the same. Be patient, the Chancellor says. Recovery is coming; wait a
few more years and things will be fine again. Well here’s the truth — they
will not.
The raft of delayed-action goodies announced in the Budget on Wednesday
disguise a programme of continued austerity which now stretches far out into
the middle of the next parliament and beyond. With each passing year, the
point at which the pain is supposed to end and things return to normal gets
pushed ever further into the future. To travel in hope, it is sometimes
said, is better than to arrive. Not in this case it’s not. A nightmare
journey confined to cattle class lies ahead.
What’s more, to get to the supposed end in five years’ time requires growth to
pick up quite sharply from next year onwards. Unfortunately, the Office for
Budget Responsibility’s forecasting record to date gives little reason to
believe in the latest set of predictions. Any shortfall, which given the
developing multiple pile-up in the eurozone looks all too possible, and
paying for all those years of Labour profligacy will take even longer, with
public debt mounting all the while.
The situation looks little short of hopeless. Trawling through the Institute
for Fiscal Studies’ always-illuminating post-Budget analysis reveals a truly
devastating story of cuts in departmental spending still to be decided,
likely tax rises and rising indebtedness.
It was all meant to be so different. Rewind to the emergency Budget of 2010,
and the deficit should by now have been reduced to £89bn, with £60bn and
£37bn pencilled in for the two years running up to the election.
In fact, the deficit is still stuck at £121bn, with £120bn and £108bn
extrapolated for the next two years. Lack of growth has completely poleaxed
the centre piece of the Government’s economic strategy — getting the deficit
under control. The flatlining economy is making the task of getting back to
sustainability in the public finances both much longer and steeper than it
was supposed to be. The IFS analysis points to a further £23bn of
departmental spending cuts still to come after the next election in 2015, or
an extra real terms reduction in spending of 7.6pc. Continued protection for
health, education and overseas aid would concentrate all these cuts on other
public services — transport, the police, defence and so on — though the
Budget Red Book notes ominously that “it would, of course, be possible to do
more of this further consolidation through tax instead”.
In view of the way protected spending is magnifying the cuts elsewhere, the IFS’s Paul Johnson reckons that such tax rises are more likely than not. I’d go further; if Labour wins the next election, they are a dead certainty.
Yet it’s even worse than it seems. To pay for his own tax giveaways, the Chancellor has engaged in accounting trickery worthy of the master illusionist himself, our unlamented former prime minister Gordon Brown.
I’m not referring here to what the Treasury has labelled “exceptional inter-period flexibility”, a deliberately mysterious term for an extraordinarily simple wheeze. Exceptional inter-period flexibility is in fact just the practice of deferring expenditure that might have been made this year into the following one so as to ensure that the political objective of some kind of a fall in the headline borrowing figure, marginal though it has turned out to be, can be met.
This is not obviously a good use of civil servants’ time, the IFS notes sarcastically. Actually, on this narrow matter, I beg to differ. No household living far beyond its means would rush to pay its bills early.
That civil servants are beginning to show the same due care and attention when dealing with taxpayers’ money is an entirely welcome development. More of that, and we wouldn’t be in this mess. Now if civil servants have got bonuses riding on their diligence, then there really would be a scandal, but we have had no evidence of them so far. Watch this space.
The more serious use of smoke and mirrors lies in the Government’s treatment of national insurance revenues from public sector employees. This is the big “gain” which has given the Chancellor the fiscal flexibility he needs to announce a series of tax and spend “giveaways” for the year after next. It’s also complicated, so do keep up there at the back.
As part of the government’s reform of the state pension, the government is in effect going to have to pay more national insurance on behalf of public sector workers than it has done. In its desperation, the Treasury has decided to bank this extra money as if it was extra tax revenue, even though this is actually just one part of the government paying more to another part. The government is actually just paying the extra revenue to itself. It’s a big sum of money — a hefty £3.3bn a year. What a find.
The wonders of public sector accounting never cease to amaze. It seems to allow things that would be considered basically fraudulent out in the real world of private enterprise. Yet even the Treasury would struggle to book such a gain without something appearing on the other side of the ledger, so where is this money going to come from?
Basically, it will have to come from extra spending cuts not yet specified. Government departments are going to have to fund the extra £3.3bn a year in national insurance from existing budgets. So that’s another £3.3bn of cuts they will have to push through after the next election. Whitehall agony is piled on Whitehall agony.
Osborne is often accused of cowardice and a lack of radicalism. He needs to be much bolder if he is ever to get to grips with the public finances, critics say. This may or may not be true, but the perhaps surprising reality is that if he is given the five years now needed to complete his plans, he will have brought about a remarkable transformation — some £24bn in selected tax cuts at the same time as a fiscal squeeze which reduces the size of the state as a proportion of GDP back to where it was before the last government began its madness. Brown’s public sector expansion will have been entirely reversed.
Promises, promises. We’ve heard them before. We should already have been well on the way, but we are not. And as things stand, it seems most unlikely Osborne will get the extra time he needs. To deliver, he also requires growth to pick up sharpish from next year onwards. Who would bet on that? And because key parts of government spending have been ring-fenced from the cuts, he’s going to have to impose destructive levels of contraction on almost everything else to succeed. It’s hard to be optimistic about his chances.
In view of the way protected spending is magnifying the cuts elsewhere, the IFS’s Paul Johnson reckons that such tax rises are more likely than not. I’d go further; if Labour wins the next election, they are a dead certainty.
Yet it’s even worse than it seems. To pay for his own tax giveaways, the Chancellor has engaged in accounting trickery worthy of the master illusionist himself, our unlamented former prime minister Gordon Brown.
I’m not referring here to what the Treasury has labelled “exceptional inter-period flexibility”, a deliberately mysterious term for an extraordinarily simple wheeze. Exceptional inter-period flexibility is in fact just the practice of deferring expenditure that might have been made this year into the following one so as to ensure that the political objective of some kind of a fall in the headline borrowing figure, marginal though it has turned out to be, can be met.
This is not obviously a good use of civil servants’ time, the IFS notes sarcastically. Actually, on this narrow matter, I beg to differ. No household living far beyond its means would rush to pay its bills early.
That civil servants are beginning to show the same due care and attention when dealing with taxpayers’ money is an entirely welcome development. More of that, and we wouldn’t be in this mess. Now if civil servants have got bonuses riding on their diligence, then there really would be a scandal, but we have had no evidence of them so far. Watch this space.
The more serious use of smoke and mirrors lies in the Government’s treatment of national insurance revenues from public sector employees. This is the big “gain” which has given the Chancellor the fiscal flexibility he needs to announce a series of tax and spend “giveaways” for the year after next. It’s also complicated, so do keep up there at the back.
As part of the government’s reform of the state pension, the government is in effect going to have to pay more national insurance on behalf of public sector workers than it has done. In its desperation, the Treasury has decided to bank this extra money as if it was extra tax revenue, even though this is actually just one part of the government paying more to another part. The government is actually just paying the extra revenue to itself. It’s a big sum of money — a hefty £3.3bn a year. What a find.
The wonders of public sector accounting never cease to amaze. It seems to allow things that would be considered basically fraudulent out in the real world of private enterprise. Yet even the Treasury would struggle to book such a gain without something appearing on the other side of the ledger, so where is this money going to come from?
Basically, it will have to come from extra spending cuts not yet specified. Government departments are going to have to fund the extra £3.3bn a year in national insurance from existing budgets. So that’s another £3.3bn of cuts they will have to push through after the next election. Whitehall agony is piled on Whitehall agony.
Osborne is often accused of cowardice and a lack of radicalism. He needs to be much bolder if he is ever to get to grips with the public finances, critics say. This may or may not be true, but the perhaps surprising reality is that if he is given the five years now needed to complete his plans, he will have brought about a remarkable transformation — some £24bn in selected tax cuts at the same time as a fiscal squeeze which reduces the size of the state as a proportion of GDP back to where it was before the last government began its madness. Brown’s public sector expansion will have been entirely reversed.
Promises, promises. We’ve heard them before. We should already have been well on the way, but we are not. And as things stand, it seems most unlikely Osborne will get the extra time he needs. To deliver, he also requires growth to pick up sharpish from next year onwards. Who would bet on that? And because key parts of government spending have been ring-fenced from the cuts, he’s going to have to impose destructive levels of contraction on almost everything else to succeed. It’s hard to be optimistic about his chances.
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