How bad are the public finances?
The economy is weak, so borrowing is higher. While public spending totals are pretty similar to those in the March Budget, tax revenue forecasts are much more pessimistic.
By 2015-16, the Office for Budget Responsibility suggests tax receipts will be about £662bn, instead of £692bn, a 4 per cent drop. And this £30bn shortfall in tax revenues translates almost exactly into a £30bn increase in public sector net borrowing.
In every year except 2012-13, borrowing is higher and the gap grows over time. This year’s figures are flattered by the inclusion of £3.5bn from the sale of the spectrum to be used by 4G mobile phones.
By 2015-16, three years of higher borrowing will push up public sector net debt by £67bn, or 4 per cent.
Why did George Osborne fail to comply with his debt rule?
The rule states that public debt as a share of national income must fall by 2015-16. To pass that test the growth in public debt must be lower than the growth in cash, or nominal, gross domestic product.
In March, a benevolent OBR took pity on the chancellor and massaged its nominal GDP growth forecast up to 5.7 per cent in 2015-16 alone, just high enough to exceed the 5.3 per cent forecast for the rise in public sector net debt.
But springtime pity has turned to winter pain for Mr Osborne, as the OBR slashed its nominal GDP growth forecast for the same year to 4.6 per cent. No fiddling of the debt figures could massage down the 5.9 per cent rise in debt now forecast by the OBR for 2015-16. The chances of complying with the debt rule have been comprehensively blown out of the water.
Does the chancellor care?
He used to care deeply when predecessors Gordon Brown and Alistair Darling broke their fiscal rules but Mr Osborne judges himself by a different standard.
Instead of setting a new rule, the Treasury says its miss is “small” and that it will retain the 2015-16 debt target even though it now looks difficult to hit.
“As set out in the June 2010 Budget, the government will set a new target once the exceptional rise in debt has been addressed,” it said. Expect a new rule shortly before the next election.
Tell me about the fiddles
The public finances are almost impossible to compare consistently with previous budgets because the statistics have been polluted by large transfers of cash or classification changes. Most important is the chancellor’s raid on surplus funds sitting in the Bank of England from its quantitative easing programme.
These surpluses are temporary, according to the OBR, so the cash grab flatters headline public borrowing figures by £12.3bn in 2013-14. However, future governments will have to pay the BoE back, to the tune of an estimated £6.6bn in 2021-22, for example.
As far as possible, all Financial Times articles have adjusted for this Treasury transfer of money as it does not affect the underlying levels of tax revenues or public spending.
Without the cash take, Mr Osborne would not be admitting to just one broken fiscal rule: the debt target would be in jeopardy in 2016-17 and he would be poised to fail to comply with his deficit rule in 2016-17.
So is the news on the deficit also terrible?
Sadly, yes. Mr Osborne had to announce an eighth year of austerity because seven years of spending cuts and tax increases were not enough to sort out the public finances.
In 2010, the chancellor said he needed five years to solve Britain's deficit problem. Two and a half years later, he still needs another five years.
The OBR has shown its teeth then?
Far from it. It has torn up its methodology to come to the aid of the chancellor. By ditching its past techniques of calculating the “output gap” and imposing more generous assumptions, it believes that in 2017, Britain will still have scope for rapid catch-up growth because output will remain 1.9 per cent below potential.
The effect of the generous output gap forecast is to flatter the government’s “structural deficit” figures, which attempt to adjust for the amount of spare capacity in the economy. This is a highly significant assumption and had the OBR shown teeth, Mr Osborne would have failed on all his fiscal targets. This benevolent OBR assumption might herald yet more big future downgrades to structural deficit forecasts.
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