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May 13, 2010 11:15 pm
For the past two years, most British households have been insulated from the global financial and economic crisis by government borrowing. Over the next few weeks, that safety blanket will be removed step-by-step.
Top of George Osborne’s list of priorities is to announce details of the £6bn of spending cuts the coalition government has pledged to impose this financial year, probably early next week. The chancellor knows it takes time for announcements to be translated into actual budget cuts for spending bodies, so he wants as little delay as possible.
Also imminent is the creation of the Office for Budget Responsibility, initially to be headed by Sir Alan Budd, chief economic adviser to the Treasury in the 1990s. The OBR will be created as a temporary body under executive powers before legislation is introduced, much as the Bank of England’s monetary policy committee was created in 1997.
Ultimately, it will be separate and independent from the Treasury, with the three-person committee publishing independent economic and borrowing forecasts twice a year. But before the emergency Budget, Mr Osborne’s aides say that Sir Alan will oversee and work with the Treasury’s economic team to produce the first forecasts.
There is little technical difficulty in producing a new economic forecast, but the OBR will also be given the more challenging task of judging whether the Treasury needs to cut spending or raise taxes to have a greater than 50 per cent chance of achieving the government’s budgetary goals.
For this to happen, Mr Osborne will finally have to specify his budgetary ambitions. So far all he has said is that the new government will reduce the structural deficit significantly faster than the existing plans.
It is to be expected that when the OBR reports before the Budget – the opening of the books moment – Sir Alan will reveal the public finances to be in a worse shape than previously thought.
It will then fall to Mr Osborne to use his Budget to spell out the tightest public spending totals seen since the second world war.
Some indication of whether the pain will be borne solely by departments other than health and overseas aid or whether welfare payments will also be cut is to form part of the Budget speech, even if the individual departmental spending totals until 2013-14 are left until the autumn.
Given the dire state of the public finances the Budget is also the moment at which significant tax increases are most likely to be announced.
Treasury officials believe faster tax revenue growth has to form part of the deficit reduction plan and have suggested that spending reductions alone cannot reduce borrowing quickly enough.
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