Autumn Statement 2015: Fiscal watchdog spares Osborne’s blushes
The government's fiscal watchdog gave chancellor George Osborne a huge boost yesterday, allowing him to escape the tax credits fiasco without it getting in the way of his plans to cut borrowing.
Government borrowing looked like it was going to overshoot the £69.5bn target in the 12 months ending March and many believed Osborne would be cornered, trying to ease the blow of tax credit cuts by applying bigger cutbacks elsewhere.
Instead, the opposite happened.
The Office for Budget Responsibility (OBR) said the government was on target to borrow £27.5bn less between the 2015-16 financial year and the 2020-21 financial year before the Autumn Statement changes were announced. That essentially gave Osborne billions of pounds to play with.
He was able to U-turn on cuts to tax credits while easing pressure on departmental budgets and boosting the government’s capital expenditure on infrastructure and housing.
But where did it all come from?
Firstly, the OBR is betting on a big increase in tax receipts in January due to a rise in self-assessment receipts.
Tax receipts are expected to carry on growing strongly thereafter – the OBR has revised up its forecast for tax receipts over the next five years by £53.2bn from its last forecast in July. It attributes some of the growth to a change in the way it models VAT and National Insurance contributions.
The OBR also gave Osborne extra room for manoeuvre by upgrading the UK’s economic growth forecast. Despite predicting a fall in export growth on a weaker outlook for the world economy, the OBR also said imports would fall, leaving the growth outlook slightly improved.
The Treasury also got a boost from the Bank of England.
Recent dovish talk from rate-setters at the Bank has pushed down short-term market interest rates on government debt, with many investors now betting on the first rate hike not arriving until the end of next year. At the time of the July forecast, early 2016 was the most likely option.
The Bank also recently said it would not sell off the £375bn stock of government bonds it accumulated during its quantitative easing programme until its base rate hit two per cent. The OBR previously assumed the Bank would start winding up its stock of UK government bonds when the base rate hit 0.75 per cent. That means it will hold on to them for longer, keeping rates slightly lower going forward and translating to less interest being paid by the Treasury.