Losing one of his fiscal rules would have been bad enough, seeing a deficit-reduction programme turn into a deficit-increasing programme quite another thing. So George Osborne got away with it today.
Nobody was surprised by the Office for Budget Responsibility’s judgment that his secondary fiscal rule – debt falling as a percentage of GDP by the end of the parliament (2015-16) – will probably now not be met, though it should still be achieved in 2016-17 according to the OBR.
However most people were surprised by the borrowing numbers for this year, and the fact that the OBR has concluded that deficit reduction is still in prospect even without the special factors being taken into account.
Those special factors – the transfer of QE coupons from Bank of England to Treasury (worth £11.5 billion this year), changes affecting a couple of the smaller state-owned banks – help bring down borrowing, excluding another special factor (the transfer of £28 billion from the Royal Mail pension fund), to £108.5 billion, from a prediction of £120 billion at the time of the March budget.
However it is another factor, this one a one-off, the expected £3.5 billion of assets from the forthcoming sale of the 4G mobile phone spectrum, which got Osborne off the hook. In underlying terms, borrowing this year would be £123.3 billion without these changes – up on 2011-12’s £121.4 billion – but the spectrum sale gives a small borrowing reduction. Whether that reduction survives until March remains to be seen, but Osborne lives to fight another day.
Osborne used that time pretty well. A £235 increase in the already big rise in the personal tax allowance from April was unexpected, two years of generous capital allowances for SMEs should boost investment and a planned cut in the main rate of corporation tax to 21% was unexpected, particularly in the light of the row over big multinational firms not paying any.
The 3p a litre fuel duty hike, due in January, has been abandoned, which will guarantee good tabloid headlines. Many will see the squeeze on working-age welfare and the reduction in pension tax relief as unfair. But for benefits to be rising at twice the rate as average earnings over the past three years – 20% versus 10% – was unsustainable. The pension raid was Osborne’s “we’re all in it together” moment.
Much of the Autumn Statement had dribbled out beforehand, some deliberately, notably the helpful £5 billion shift from current to capital spending over the next three years. The only problem with that, politically, is that some of it looks like a squeeze on departments to pay for a Tory party pet project, free schools.
Even so, it was a grievous error by Labour to plan for big cuts in capital spending – that part of tax and spend which has the biggest multiplier – and a mistake for the coalition to endorse most of those cuts. Cutting current spending is always politically more difficult, so capital is an easy target. Slowly, very slowly, that mistake is being corrected.
This piece is cross-posted from David Smith’s Economics UK with permission.