Osborne’s lucky escape on the deficit
FOR once, and I can barely believe that I’m writing this, George Osborne has reason to be happy. The budget deficit for this fiscal year to date (April 2011-January 2012) was a still horrendous, Greek-style £93.5bn, but this was down £15.6bn from a year earlier, a very non-Greek development. This is a much better performance than expected by the Office for Budget Responsibility (OBR): it was hoping for a decline of just £9bn for the whole year (from £135.8bn in 2010-11). Unless the situation worsens drastically over the next two months, it looks as if Osborne’s deficit reduction plans have moved slightly ahead of target.
Even better was the reason for this improvement: spending is growing in cash terms at a slower rate, and falling faster in real terms. Central government current spending has risen by just 1.6 per cent so far this fiscal year, versus a forecast of a 3.1 per cent rise over the full year. Local authority finances were also better than expected. Perhaps less happily, spending on capital projects is also falling faster than expected, something worth remembering next time a government minister claims that infrastructure projects are being protected.
While spending seems to be under control – this could yet change as officials often go on scandalous splurges to max out budgets just before the end of the financial year – tax receipts have slowed. This is an excellent development: the reduction in the deficit is being achieved through reduced spending growth, not by clobbering taxpayers even more. Central government revenues were up 2.8 per cent year on year in January, with growth over the year to date at 4.7 per cent. Citi’s Michael Saunders is predicting a deficit of “just” £122bn this financial year, £5bn less than the official forecast. Simon Ward of Henderson is predicting £119bn, close to the OBR’s original £116bn forecast at the time of Osborne’s first Budget in June 2010. It would equate to 7.8 per cent of GDP, compared with a peak of 11.1 per cent in 2009-10. If this materialises, it would be a devastating blow to the OBR’s credibility, suggesting its recent revisions were far too pessimistic.
But it would be grossly premature to uncork the champagne. The UK’s six-year deficit reduction plan remains out of reach. The spending undershoot this year seems to have happened by chance. What the Chancellor should actually be doing is to accept that bigger, faster cuts are possible – as demonstrated by his surprise, unplanned budgetary success in recent months – and revise his budget for next year accordingly. If he does that, he will have earned the credibility to introduce tax cuts at his Budget next month. These should be supply-side measures that will partly pay for themselves by stimulating growth; there should be no fiddling with demand-side measures such as Vat.
Osborne ought to consider either slashing corporation tax to 20p as quickly as possible (from 26p today) or cutting employers’ national insurance contributions, reducing the cost of labour and increasing its demand. I’m assuming that he will not want to scrap the competitiveness-destroying 50p top rate, even though the drop in income tax receipts in January further suggests it is not raising much money. But if the past 10 months have shown anything, it is that there is more fat to chop out of the UK’s bloated government budget than is usually realised – and that this is the time for greater boldness on the tax front.
Follow me on Twitter: @allisterheath