Osborne running out of wriggle room, warns IFS

17 Mar 16

Chancellor George Osborne is only on track to meet his one unbroken fiscal target thanks to some “fiddling around” with incomings and outgoings of the public purse, the Institute for Fiscal Studies has said.

Presenting the IFS’s analysis of yesterday’s Budget today, director of the think-tank Paul Johnson noted that the chancellor is running out of wriggle room and will not be able to rely on a similar accounting sleight of hand if the economy takes a turn for the worse in the future.

Instead, if the Office for Budget Responsibility was to forecast a deterioration in the public finances later on, Osborne would have to pursue “more real policy change” to stick to his self-imposed target of delivering a budget surplus by 2019/20 rather than just shifting some numbers around, he stated.

Johnson explained that the chancellor was able to say he was set to achieve his target yesterday largely “by the simple expedient of moving capital spending forward and corporation taxes back”.

Capital spending increases in 2017/18 and 2018/19 but falls in 2019/20, when there will also be a tax increase of over £6bn.

The biggest boost in 2019/20 comes from delaying new rules that ensure firms pay their corporate tax earlier.

This was scheduled to happen in 2017/18 but will now be delayed until 2019/20, “flattering” the public finances that year instead – which as Johnson noted is “very handy” for the chancellor. 

The same year will also see the £3.5bn worth of spending cuts plus an extra £2bn impost on public sector employers through higher pension contributions.

Together, these measures put the chancellor on track to achieve a surplus of £10bn in 2019/20, despite the OBR downgrading growth for the next four years, a £56bn “black hole” in the public finances, and forecasts for lower future productivity growth.

The IFS’s Gemma Tetlow also pointed out that “without these actions he would have been on course to break the mandate”.

Similarly, further “shuffling” of revenues and spending combined with pencilling in another year of austerity that was supposed to end in 2019/20 are the only things saving Osborne from a deficit in 2020/21. As Johnson and his IFS colleague Rowena Crawford pointed out, spending that year will be almost £10bn less than planned.

Osborne still has only a 50/50 chance of meeting his target by 2019/20, Johnson said. This is exacerbated by the fact that he relies on some uncertain streams of revenue, such as the money he plans to gain from anti-tax avoidance measures.

While the chancellor has made a difficult “trade off” by pursuing anti-tax avoidance measures, which can affect genuine business activities, Johnson noted that his cuts to corporation tax will benefit big business.

He said the cut to corporation tax, which was already due to fall to the lowest rate in the OECD, was “yet more evidence of the government’s focus on making the UK an attractive proposition for multinational companies”.

“There can be no doubting the ambition that comes with a cut in the headline rate from 28% to 17% in a decade, at considerable fiscal cost in a period of austerity,” he stated.

The IFS also noted the “curious structure” of the new sugar levy, which will see the more sugary drinks pay less than those that contain less sugar content per gram, due to being based instead on the sugar content per litre.

Kate Smith of the IFS noted that the impact of this tax will be dependent on how businesses and consumers react to the levy.

The IFS also noted that some of the chancellor’s measures will be more expensive or raise less money in the future than they do towards the end of this parliament.

This means in the long run public finances will be weaker, and his successors will find it increasingly difficult to meet his fiscal mandate.

The most worrying news in yesterday’s budget speech however, Johnson noted, was the downgrading of the UK’s future productivity growth.

“If the OBR is right about that we should all be worried,” he said. “This will lead to lower wages and living standards, not just lower tax revenues for the Treasury.”

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