By Colin Talbot | 1 Mar 2013
As George Osborne prepares for his Budget on March 20, the loss of the UK's triple A rating is news he could have done without. Colin Talbot asks where did it all go wrong for the chancellor who hit the ground deficit-cutting in 2010?
Budgets are politics, sometimes very big politics. And Budget 2013 is set to be one of the biggest in many different ways.
On a personal level, Chancellor George Osborne has to try to restore his credibility after the ‘omnishambles’ of Budget 2012.
On an economic level, Britain is in serious danger of technically entering a triple-dip recession if the quarter in which the Budget is delivered also turns out to have below zero growth. Where is the government’s growth strategy or will this Budget finally demonstrate that apart from austerity, it hasn’t got one?
On a fiscal level, the government has to try to show how its stalled deficit reduction programme is going to be put back on track. Will it be forced to ease off, as many have been urging, or carry on in the hope that ‘something will turn up’?
It also has to somehow manage the emerging rows over priorities. We will not fully find out what it intends to do until the Spending Review, which is likely to be later this year – probably October – rather than the July date usually favoured by Labour. And the government is forecast to borrow an astonishing £64bn more than originally planned.
On a financial level, Osborne has put great store by retaining Britain’s triple A credit rating, which is now seriously under threat. How is he going to avoid a downgrade, if he can, and explain it, if he can’t?
And finally, his Budget could be the beginning of the end-game for the coalition. The cement that has held the Conservatives and Liberal Democrats together has been a shared deficit reduction strategy. But can they really go into the next election still sharing a fiscal strategy – or will this Budget see the cracks widen as they gear up to fight each other in 2015?
Osborne and his coalition colleagues have been spectacularly successful in one respect – they convinced the majority in Britain that the last Labour government spent too much on public services and welfare and ‘maxed out the country’s credit card’ as they usually, misleadingly, put it. They also successfully revived Mrs Thatcher’s Tina (there is no alternative) by convincing people that it was their deficit reduction strategy or we were all going to hell in a handcart.
And for a while it seemed to be working. They easily pushed through first an Emergency Budget and then a Spending Review in 2010, cutting planned spending on services especially, and local government in particular, at unheard of rates for the next four years.
Welfare cuts would take longer, and were scheduled for the second half of the Parliament. Where many seasoned observers expected spending ministers and their departments to squeal in protest, instead they mostly fell over themselves to offer up huge cuts in spending on programmes, and even bigger reductions in their own running costs. The turkeys really were voting for Christmas.
Osborne’s highly effective propaganda campaign convinced most people that New Labour had ‘spent too much’ on services and welfare and had ‘failed to fix the roof while the sun was shining’ by allowing government deficits and debt to grow too big.
In doing this, George Osborne effectively won some of the crucial battles about broad budget politics.
In the first place, he focused on the politics of budget size and balance: how big should government be and how much deficit and debt should it have? Osborne succeeded in convincing the public that the deficit had to be cut to zero, while carefully avoiding discussion of how long it would be before public debt (the accumulated deficits) would fall to pre-global financial crisis levels. He also got away with the idea that the major pain should come in spending cuts and not tax rises.
Then, the chancellor turned to the politics of spending: what should a government’s spending priorities be? He successfully argued he would protect health (mostly) and education (almost) and would actually increase overseas development aid. Everything else – even the usual Tory sacred cows of defence and policing – could be savagely cut.
Finally, Osborne dealt with the politics of revenue: where, on what and from whom should governments get their money? In the first two years, he successfully managed the small tax increases he either carried over from New Labour (50% top rate) or implemented himself (VAT) to maintain the idea that ‘we are all in it together’.
There was also a political debate about budgets that Osborne won almost by default – about the overall process by which these things are done.
Many observers might have expected, reasonably, that a Conservative chancellor would dump the whole Spending Review paraphernalia of medium-term, multi-year, spending plans introduced by Gordon Brown.
It would be easy to argue that such ‘Soviet-style’ planning was anachronistic and especially irrelevant in a period of turbulence.
Instead, Osborne embraced Brown’s reform wholeheartedly and even extended it – Spending Review 2010 turned out to be a four-year plan. Brown and his successor as chancellor, Alistair Darling, had never tried anything longer than three years and mostly only managed two.
The advantage of a four-year plan for Osborne far outweighed any misgivings he might have had about Soviet-style planning. It cemented the coalition into a straitjacket of spending and welfare cuts that it would be hard for either party to wriggle out of once SR2010 was agreed. It meant that when the real pain of the cuts started to bite and possible divisions started to emerge, Osborne could say that everyone had signed up to his plan.
Externally, he could point to his fixed four-year deficit reduction plan as a clear sign that the coalition meant business and the UK was ‘dealing’ with its problems (so please don’t mess with our credit rating). He could add that he had created the Office for Budget Responsibility as an independent check on the credibility of his plans and their implementation.
For two years, this strategy worked, more or less. There was no serious questioning of his overall deficit reduction strategy focused on achieving a ‘balanced budget’ by 2015. Disputes about spending cuts within the government were kept to a minimum. There was no serious debate about taxation. And the overall process seemed to be firmly institutionalised.
Then, all four wheels of Osborne’s political juggernaut on public finances began to wobble or even drop off. The root cause has been the failure of the economy to respond in the way Osborne confidently predicted, but there have been other reasons too.
Let’s start with the ones that have so far received least attention.
First, Osborne’s much vaunted OBR reform has turned into something of a damp squib. The credibility of this reform lay in the key ability of the OBR to accurately forecast the economy ‘free from political interference’, which in the past had allegedly caused Treasury forecasts to be consistently over-optimistic.
Unfortunately, the OBR, headed by respected economist Robert Chote, has proved no better than most independent forecasters on this front, and indeed has been worse than many.
Overall, the economy has flatlined, when the OBR said it would grow – it is currently 6% below the OBR’s 2010 projection for this year. So far every individual OBR forecast has had to be downgraded by the next one, undermining their credibility.
This is hardly surprising, as the OBR uses the same model and data as the Treasury, with just a few tweaks of its own to the assumptions and a bit of realism about the uncertainty inherent in forecasting.
The OBR’s credibility relied from the start on it being the ‘official’ forecaster, but that was always a fairly flimsy basis for any claim to be taken seriously. It needed to establish its credibility rapidly by doing two things.
The first was to develop a track record for reasonably accurate forecasts, which it has signally failed to do so far.
The second was to demonstrate its independence by openly challenging the chancellor’s judgements – otherwise why does the ‘responsibility’ bit in its title mean anything? So far, again, there has been little sign of this.
The four-year Spending Review itself has started to unravel in two directions.
First, and predictably, it will not run its full course. If it did, we’d have SR2014 – which if published in the autumn would be only months away from the general election. There was never much chance of the two coalition parties going into the next election on a joint fiscal programme, even if events hadn’t so thoroughly undermined the assumptions of SR2010.
Secondly, Osborne has already been forced by the flatlining economy into major revisions. And, just like Brown and Darling before him, he has had to use his Autumn Statement to announce major changes (something he vowed never to do). In January, the influential and coalition-dominated Commons Treasury select committee said the Autumn Statement had ‘taken on the role of being a second, full, Budget’, generating unnecessary uncertainty and change.
The politics of the ‘balanced budget’ has also backfired. Osborne set much store by the claim that he could eliminate the deficit in one Parliament but has had to gradually and grudgingly revise this, pushing this state of nirvana further and further back.
The result of all this, according to the influential Institute for Fiscal Studies, is that ‘borrowing is forecast to be £64bn higher in 2014/15 than he originally hoped’. It says: ‘On current plans public service spending in “unprotected” Whitehall departments could fall by a third between 2010/11 and 2017/18’ and public sector employment will have fallen by 1.2 million.
Worse still, the boasts of early progress have started to come unstuck. The government has been claiming to have ‘cut the deficit by 25%’ since taking office, but this turns out not to be a real 25%, but a ‘cyclically adjusted’ 25%. The real figure is about 16% and, since the start of 2012, even that seems to have stalled.
Now Osborne and his coalition partners face the prospect of trying to agree an ongoing deficit reduction strategy well into the next Parliament. It is even likely that the real reduction by the end of this Parliament will be at or below the 50% reduction that Darling claimed he would make. This would be an enormous blow to Osborne’s political credibility. After all the fuss, all he would have achieved is what Labour had said it would do.
On the politics of spending priorities, Osborne is also starting to come under pressure. Deputy Prime Minister Nick Clegg has said that cuts to capital spending in the first two years were too high, forcing Osborne into the politically embarrassing position of claiming that he was only doing what Darling planned to do to capital spending. Not a very credible, or feasible, defence.
As SR2013 looms, pressures within the coalition and even within the Conservatives over spending areas have finally started to emerge, with ministers saying their budgets can’t take any more slash and burn. Theresa May (Home Office), Vince Cable (Business) and Philip Hammond (Defence) are all reported to have told the chancellor to look elsewhere for more spending cuts at what was described as a ‘tense’ Cabinet meeting in January. But ‘unprotected’ areas, including police, justice and business support, are all on the agenda for more cuts.
Osborne is reported to be determined to protect health, education, pensioners’ universal benefits and overseas aid, despite the resistance of fellow ministers. But he’s already been forced to give ground on defence, as the PM announced an apparent ‘defence guarantee’ that spending would rise ‘in real terms’ under the next (Tory) government. Which, of course, will put more pressure on other areas.
But it is on the politics of taxation that Osborne’s credibility has so far taken the biggest hit. His ‘omnishambles’, top-rate income tax reducing 2012 Budget must be one of the worst received Budgets of modern times. Osborne’s personal ratings plummeted after the 2012 budget, according to Ipsos-Mori. His dissatisfaction rating rose to 58% in April 2012, from only 23% in June 2010. This is the worst rating for a chancellor since Ken Clarke in 1994.
The immediate cause was obvious enough. Cutting the top-rate of tax to 45% while introducing a series of badly thought-out minor tax rises – pasties, caravans, etc – followed by head-spinning U-turns, left the chancellor looking shambolic.
Some of this might not have been Osborne’s fault. The reorganisation of tax functions under New Labour – merging Inland Revenue and Customs – also included a significant transfer of policy-making from the revenue to the Treasury.
As a committee organised by the IFS pointed out in 2010, the lack of expertise and high turnover of Treasury staff led to a degradation of tax policy-making. The ‘pasty tax’ and other fiascos might have been as much a result of these structural changes as Osborne’s lack of attention to detail.
Although the chancellor has since recovered some semblance of credibility – his 2012 Autumn Statement went down reasonably well – these sort of events leave a lasting impression in the public mind.
If the economy suddenly picks up and ‘expansionary fiscal contraction’ starts to work, Osborne might yet escape from Gordon Brown’s famous dictum about chancellors – they either get out in time or they end as failures. But at the rate the political wheels are coming off his ‘plan’, that seems unlikely. It is doubtful he would come well out of being dubbed ‘triple-dipping George’, which is probably what will happen if the first quarter of 2013 lives down to most people’s expectations.
There may be trouble ahead for Osborne. And it will be on a scale even he couldn’t have imagined when quipping before the last election that he would soon be the most unpopular chancellor ever.
Colin Talbot is professor of government and public administration at the University of Manchester
This article first appeared in the March edition of Public Finance
