Thursday, 19 March 2015

Why is the UK Budget like a hockey stick?

Take a look at the graph above. Notice anything strange? It's from the official Office for Budget Responsibility (OBR) reaction to yesterday's UK Budget, and it shows the public spending assumptions implicit in that document. And yes, your eyes are not deceiving you - the numbers show a huge, huge fall in public spending over 2016/17 and 2017/18, before a rather lighter and more familiar austerity is resumed in 2018/19. Then we get what Fraser Nelson of The Spectator calls 'a weird public spending splurge' - probably at the behest of the Prime Minister, worried about being accused of being a mad, ideologically-motivated cutter during a General Election campaign. The Government just drew a great big hockey stick of a wiggly line across the public accounts.

We're sorry, but this won't wash. It's intellectually incoherent and impossible, in practice, to deliver.

Now we've always known - and always said here - that the Chancellor's planned cuts for the next Parliament just won't happen. If we take 'protected departments' out of the mix - education, the National Health Service, overseas aid and the like - we'd be looking at chopping out something like a third of all public spending. Would you like to see a policeman? Have your elderly relatives looked after? Help the young reskill in Further Education? Hold down the interest rates on student loans? Well, if these went through, you can forget all that. And lots more.

Which is a pity, because there were some things to welcome and admire among yesterday's announcements. Abolishing Class 2 National Insurance payments and the paper tax return, while allowing the self-employed to spread their payments. Some chunky tax cuts for North Sea oil and gas (the forecasts for which look as scary as a horror film). Some small-scale help for fast broadband and church roofs. There's nothing particularly controversial there.

Yesterday's Budget did ease up on some of the planned austerity. The Chancellor, George Osborne, used the windfall from much lower inflation to reduce the pace of cuts. But he massaged down his planned late-Parliament surplus in order to do just one thing: shoot Labour's fox by stopping them going around saying that spending is about to fall to the lowest levels since the 1930s. Of course, on some measures it'll now fall to what it was in the late 1950s, or in 1964, but that's beside the point. Mr Osborne didn't want to look like a Gradgrind Chancellor, grinding the faces of the poor into the dirt. So he agreed with No. 10 to chuck in loads of cash at the end of the period - which will be more than conveniently forgotten about in a few years. But he still wanted to get to a surplus in one Parliament, before helping his Conservative colleagues throw around some tax cuts as they move towards another election. The graph above is the consequence of that political decision. It's that simple.

Don't think anyone's getting away with anything. This Budget means well over £20bn of cuts overall - and maybe about £40bn between now and 2018/19 (don't take our word for it, ask the independent Institute for Fiscal Studies). The Chancellor has been 'softening' this line as regards actual goods and services only by saying he'll take something like £12bn or 13bn out of the welfare budget, and raise £5bn chasing tax avoidance and evasion. £18bn off £40 is £22bn, if our maths are right - a slightly less ludicrous figure. Mr Osborne won't actually say how he'll do that: he'd have to abolish child benefit, make social housing tenants pay some more of their rent by reducing Housing Benefit, and freeze all working tax credits for the whole of the Parliament to make those welfare savings, for instance. Even that'd only just get him there. It seems less than do-able, to be honest. Even if it was possible, to meet his targets Mr Osborne would still need about £22bn from the Home Office, Defence, Business, Innovation and Skills and local government. In just four years. The whole of the current annual budget for BIS is about £16bn, just so you know, and the Home Office and Ministry of Justice dispose of about £32bn for public safety and the law. This level of cuts basically means gutting non-protected departments. It's that serious - which is why it won't happen.

Getting those huge sums out of that lot, even if things go well, would feel like slamming on the emergency brakes and threatening to derail a speeding train. Before, bizarrely, firing the engines right back up again in the ditch the Government would have run us all into. How much damage will have been done to morale, networking, know-how, organisation and good old-fashioned experience in the interim, do you think? Take a look at what the OBR said about this Budget (opens as PDF):
One important consequence of all of this is that implied public services spending is on a rollercoaster profile through the next parliament, with deeper real cuts in the second and third years than we have seen to date followed by the sharpest increase for a decade in the fifth. It is important to emphasise that this profile arises from what the Government itself describes as a ‘fiscal assumption’ and not from firm and detailed departmental plans. But it will form the baseline for whichever party or parties are in government after the election and have to carry out the next spending review. This profile for implied public services spending may have ticked a number of boxes for this Budget, but it will not have made that task any easier.
For which read: this isn't happening, and we have just tied ourselves in a load more knots trying to say that it will. In a better-managed world, that graph above would look a lot smoother, and it wouldn't dive so quickly downwards after a couple of okay years at about the time of a General Election.

Our advice? Don't hold your breath for anything so rational or so obvious.