We had hoped to welcome today’s budget by congratulating the Office for Budgetary Responsibility for bringing its forecasts into line with what Cebr has been saying since 2010. But though its short term forecasts are now looking much closer to our view, its medium term forecasts remain unrealistic. And so the Chancellor’s chance of hitting his borrowing targets are very low, especially in the increasingly fractious international economic situation that has followed the Cyprus banking crisis. In Abu Dhabi yesterday, I was told that Middle East investors would avoid the European banking system like the plague.
George Osborne has claimed that he has introduced a neutral Budget. Listening to him dole out goody after goody, it was difficult to see how this could be so. And after looking at the small print, it is clear that it is not. By 2015/16 the Chancellor has added £2.8 billion to demand and only keeps the number this small by claiming £1.4 billion from alleged anti-tax avoidance measures. So in fact this is a £4.2 billion Budgetary expansion.
In later years this is purported to be clawed back mainly from forcing currently contracted out (mainly public sector )employers and employees to pay higher NI contributions but the Chancellor indicated that his spending totals might be adjusted for this, so in practice this source of finance may not actually be able to reduce borrowing.
The measures in the Budget look sensible, other than the failure to cut top rates of tax and particularly the high rate of tax clawback between £100,000 and £150,000 where marginal rates of tax and national insurance can reach 80% and which is probably the biggest single incentive towards the playing of golf midweek that could possibly exist.
Boosts to infrastructural spending, to the housing market, the cut in NI contributions and the cut in corporation tax are all sensible measures that will in time lead to higher GDP and employment. Freezing fuel duty and cutting beer duty while accelerating the rise in the income tax allowance will support the consumer. And revised monetary policies may work as they appear to be doing in the US, though the measures have not yet been spelt out in detail.
So actually the Chancellor has taken a leaf out of his critics’ books while claiming he is not. It is a small leaf – much less than ½% of GDP. And he is essentially relying on the OBR’s forecasts to claim that this means lower borrowing eventually.
But with UK bonds already facing further downgrades from the ratings agencies, Mr Osborne is taking a risk on borrowing. In our view he will probably get away with it – the downgrades would have happened anyway. But essentially he seems to have decided that since he has lost his fiscal virginity, he might as well enjoy himself.