Osborne's headache

James

More gongs for Sir Humphrey

Widmerpool

More evidence I fear that Osborne needs to grow up. He still has a habit of trying to be too clever by half and things rebound on him like the Tory IHT tax break "for millinaires" only which became sacrificial planking in the coalition. St Vince is quietly waiting in the wings for the Boy to be too clever by half!

TomTom

Somewhere to the east of London lies The Mainland and it seems to be having problems. Moodys declares Greek bonds junk and the ECB is buying them. Meanwhile Sarkozy has Merkel agreeing to Economic Government of the 27 which means Britain pays for Spain to save RBS from writing down its bond holdings.

It is not the UK economy that makes spending cuts an issue, but FUNDING the banks, the LBO rollovers and the PSBR at the same time as Euroland is looking to fund its deficits.

Crowding Out is both Sovereign States and Private Sector nowadays with Unfunded Public Liabilities out of control

Marcher Baron

"the extraordinary announcement from the Budget of Office Responsibility (sic)" Was it excitement that caused you to get the words in the wrong order, Fraser?

John Moss

I'm sorry? What mad world are you living in?

We have near £1 trillion of on-balance sheets debts, probably £2 trillion of unfunded future liabilities and you think "only" borrowing a little over £500 billion in the next five years is "better"!

We have to get back to surplus budgets to reduce the national debt to a sustainable level of around 40% of GDP. That will take serious reductions in state spending, or growth at levels we have not seen in Britain since the 19th century.

Labour have loaded us, our children and grandchildren with debts of a scale never before seen in peacetime. We probably face similar levels of austerity as we saw in the decade after WW2, just to back to break even and you think this is something not to worry about?

It is precisely that attitude, that "new paradigm" bollocks that got us in to this mess in the first place.

THX1138

Fraser, all good news indeed, but i'll tell you what is down business confidence. According to the BDO Business Trends survey out today , business confidence is as it's lowest since they started compiling the survey back in 95. It would appear that big public sector cuts may be giving private sector businesses the jitters.

One of my clients trades a lot with the public sector and is worried, and for instance hasn't replaced a sales head (what's the point).. The private and public are not two seperate parts of the British economy, many private sector jobs will be lost too when the cuts come.

Osborne had better be very carful, or double dip here we come.

nonny mouse

>>So no extra cut, or tax hike, is needed to meet this pledge.

This misses the point. Darling gave us totals but didnt tell us what the cuts/tax rises would be to meet them. This means that Labour get to say 'nasty tory cuts' even though they would have made similar cuts.

Labour are in effect trying to gain credit for Tory cuts without the pain. Dont let them get away with it.

DavidDP

I thought tax revenue was going to plummet due to Laffer issues......

Barry Bilge

How much of the improvement in the OBR forecast versus the Budget 2010 forecast is the cuts the coalition has insisted it will stick to?

With Darling promising £8bn to the Eurozone in his last act as chancellor what cuts in other places would Darling have made to provide that £8bn? If he was going to borrow it rather than cut that is a remarkably similar figure to the money he claimed he had hidden from Brown.(The £7bn lower than expected deficit) How duplicitous of him.

mongoose

John Moss - right!
Moreover the fiscal deficit is the difference between two very big numbers, so it fluctuates quite wildly. The differences between the OBR forecast for the deficit and Darling's budget forecast are well within the normal range of fluctuation. The OBR report says that the structural deficit, which is the "metric that matters", starts higher and then falls faster than in Darling's forecast. So, as GGO says, the fiscal position is indeed worse in the near term, but it'll get better over time. We hope so.

Simon Too

I think you are missing something here. When the rest of us were screaming that things were worse than the Labour administration was acknowledging, we were pulling our hair out that Osborne and Cameron were not making that point, let alone driving it home. Bizarrely, at that time they seemed to be taking an unreasonably Pollyanna-ish view of the public finances and missing some easy political goals.

So it looks as though the figures are not as bad as we, as in thee and me, thought; but they ARE worse than Osborne and Cameron thought. Either those are two smart cookies or they have the good fortune to be on the right side of a self-correcting balls-up.

Whatever the reason, it seems perfectly accurate for Osborne to say that the figures are worse than "we", that is he and Cameron, thought.

TomTom

Osborne's other headache is BP. If the largest oil and gas explorer in the USA is damaged it cuts UK tax revenue and undermines public and private FUNDED pensions. It also bring Peak Oil Problems earlier as deepwater drilling is the source of much oil.

If the USA does not introduce petrol rationing (by price or quantity) we are headed for Stagflation as energy input costs soar and growth slumps

DavidL

Fraser, first of all this assumes that the OBR forecasts (with all of a fortnight's solid work behind them) are more accurate than the previous forecasts or the City consensus. It is a little early to call that.
Secondly, the obvious and main reason for the increase in tax receipts despite a reducing GDP growth forecast is because the OBR recognise that there are substantial tax increases in Labour's figures which were only to come into force after the election. Osborne still has to choose between implementing these tax increases or cutting expenditure further.
Thirdly, an increase in the structural deficit is not good news, nor is a reduction to 2.8% structural acceptable. Given our massively increased debt burden the only sensible policy is to try to get into surplus and start repaying debt. Such a strategy will significantly reduce the burden of funding the debt mountain because the risk of default will be falling instead of increasing. Greece has made that particularly urgent as the Germans have already accepted with their constitutional amendments. The days of politicians bribing us with our own money are over. There is serious work to do and you are understating it.

Neil Wilson

Unfortunately the figures are likely to be like this because of the deficit spending. Once the structural is cut much of it will merely move to the automatic stabiliser.

So cuts will hurt, but it won't bring the deficit down. Expect the "Don't mention the total deficit" trick. You'll only ever hear the government talking structural from now on.

Nicholas Hallam

"GDP is revised down, but the tax haul is revised up"

As this is central to your analysis, Fraser, I should like to understand how the Treasury managed to decouple GDP growth and tax revenue. Does it depend, I wonder, on the 50% rate actually increasing the Income Tax take despite the Laffer Curve?

Neil Wilson

"We have near £1 trillion of on-balance sheets debts, probably £2 trillion of unfunded future liabilities and you think "only" borrowing a little over £500 billion in the next five years is "better"!"

No we don't. They are all in sterling, and we own sterling. A government can always settle debts and interest in a currency it owns. It doesn't need to borrow - that is an optional constraint put in place to ensure more money flows through to capital by creating an artificial exchange rate lock.

A government is not a household and doesn't need to 'fund' its spending in a fiat currency. If you create and spend £100 then tax and burn at 10% on each transaction then a simple geometric transaction sequence will show how that created money all magically disappears again.

Don't fall for truth by repeated assertion.

Neil Wilson

"One of my clients trades a lot with the public sector"

And that has been the problem over the last decade or so. Too many private companies too dependent on the Westminster teat.

Standing in the waterfall of money diverting a bit for yourself was a business strategy for the last decade. Time for a new one.

Neil Wilson

"Given our massively increased debt burden the only sensible policy is to try to get into surplus and start repaying debt."

If the public sector gets into surplus, then the private sector will be in deficit. The export boom prayed for by the Governer of the BoE isn't going to happen with the rest of the world as broke as we are.

I don't think the private sector has any capacity left to borrow more.

"Such a strategy will significantly reduce the burden of funding the debt mountain because the risk of default will be falling instead of increasing."

There is no risk of the UK defaulting. We own the currency and can settle all transactions at the push of a computer button.

"Greece has made that particularly urgent as the Germans have already accepted with their constitutional amendments."

Greece has a locked exchange rate with the Germans via the Euro. Greece is now effectively the German's Northern Ireland. They must solve the problem in the same way - transfer payments from Germany to Greece.

Comparing any of the GIPSIs with the UK is comparing apples and pears. Our currency is free floating.

Fergus Pickering

Don't be silly, Widmerpool. Were Vince Cable Jesus Christ himself, neither he nor any other Lib Dem would have the slightest chance of getting hands on the Chancellorship. George will still be there in five years time when the next election comes up. The Lib dems only chance will be to stick by the coalition and then we will have - another five years of the same. Well, I mean to say, look at the alternative. TINA, my dear boy. TINA.

Wight Tory

Lets get this thing straight, it confirms that Labour mess isn't as bad as first thought, it hasn't gone away though...

John Moss

"If the public sector gets into surplus, then the private sector will be in deficit."

This is nonsense. Have you never heard fo "crowding out"?

If the Government repays debt, it puts cash in to the hands of investors and no longer demand spare cash from them. Then, no longer having an easy choice of low risk Government debt to buy, they invest in productive, private sector assets. That raises productivity, GDP and asset values - ATW, helping to solve the pension fund deficit problem.

Chuck Unsworth

@ Fergus Pickering

"Were Vince Cable Jesus Christ himself"

I suspect that both he and his acolytes believe that to be so.

chris as usual

We got into this mess because the experts and pundits like you could not see it coming, whilst the rest of us, particularly the oldies like me, knew years ago that we were in deep s**t.

Don't let this happen again.

Why should our grandchildren be funding public sector pensions, when their parents in the private sector have been conned, for example? How is this to be afforded? Is it fair?

EyeSee

It wouldn't be a huge surprise if this was the case. The country was doing its best under a regime that meant it harm, but the banks caused the recession. It wasn't a real one, it was a money supply one. There was no lack of confidence, or failure of industry, it was just the banks screwing themselves up, which then affects everything else. (And that is why there should have been mass sackings as a cost of public support). Brown allowed it to happen without a doubt, but his real problem was that it threw his reckless spending into the light too. So, still a lot of work to do to get the country back, but unsurprisingly, Joe Public and the companies he runs and works for, have been doing their bit regardless. Could do with some recognition I reckon.

oldtimer

These differences are all well within the margin of error. They do not remove the need for the cuts and the reforms required to right the ship of state.

The other good thing about the OBR report is the start it has made on discussing the off balance sheet, Enron style obligations that have been lurking in the background. Put this lot together and I do not see why Osborne is said to have a problem explaining what he has to do next week. It is time to get a sense of proportion.

Percy

Writing rubbish like this Frazer you'd never guess you were an arts graduate.

TomTom

"Greece has made that particularly urgent as the Germans have already accepted with their constitutional amendments."

What "Constitutional Amendments" ? The whole German package was framed to skirt the Verfassung including a get-out clause that IF ANY Constitutional Court ruled against the package in ANY EU participant, Germany would not fund any bail out

Jane

I don't know about all this analysis as I get a different synopsis depending on which newspaper/Institute assessment I read. I am not an economist but feel somehow that journalists are highlighting areas of the report to support their own views.

I accept that the borrowing figures are less. The March budget indicated 4%of national income and the report yesterday forecast 3.9% by 2014/5. You mentioned that growth would be slower so surely the structural deficit will grow accordingly? You did not mention that many economists still think the growth forecast remains on the high side - another factor to take into account. Therefore the report points up two areas of difference - slower economic growth and a mush worse structural deficit. The report also indicates that public sector pensions will rise from £4bn to £9.4bn by 2014/15. This is alarming.

The IFS points up some interesting differences between the March budget and the report yesterday. Structural borrowing .3% higher by 2014/5 which suggests that health of public finances is worse. March budget indicated a weakening in public finances of 4.7% of national income(£69bn) The report yesterday stated it would be £74bn.

Is it any wonder that the political argument continues as each party seeks to draw on the figures which supports their own position. Alastair Darling does not want his stint in the Treasury rubbished - quite right as he did a sterling job after the machinations and pressure from his predecessor. I am now getting the same arguments from journalists.

What is apparent is that our country has a huge deficit. In 2000 total government spending amounted to 36.8% of national income and this year it stands at 48% of national income. We cannot sustain this and the argument for me now is how do we reduce our expenditure without causing too much harm to our economy.

The new coalition has made an excellent start - we are obtaining data on expenditure and the first rather good report compiled in such a short period from the OBR. Wonderful to remove political meddling from this important forecasting. I for one am supporting the coalition in the difficult decisions it has to reach. I sometimes wish some of the comment from journalists on this site did so too. Perhaps you are not overly concerned about the public - we still like coalition government. We like compromise and people acting in the interests of the country and not their own short term political aims. As a long time labour supporter that is what the last government under GB did. (That is why Alastair Darling hid the true state of public finances from the then PM). I do believe the coalition hasplaced the needs of the country first. Well done to them.

Fergus Pickering

Was Jesus bald? A Latin writer (Josephus I think) says he was short and ugly. But was he bald?

John Goode

Aren't we missing the big picture

Whether we have £155bn pa or £163bn pa annual deficit it's still a massive deficit that has to be dealt with. It's like the difference being shot in the stomach with a 0.44 calibre round and a 0.45 calibre round; You're still bleeding from the gut whatever happens.

As John Moss 14th June 10.46 am points out we have £890 bn (nearly 1 TRILLION) Net Debts recognised on the books. The gold plated pensions of middle to high ranking Bureaucrats and Quangocrats add another £1.5 TRILLION on top of that.

I'm not sure why journalist tend to focus on insignificant detail when whe have such earth shattering issues to constend with.

AlexK

If a 'not as bad as we thought' situation causes someone a headache can we deduce that 'a much worse than we thought' situation would fill them with the joys of spring?
I know which one I would prefer if I was the Chancellor.

Warren Fisher's Ghost

@Neil Wilson: "There is no risk of the UK defaulting. We ... can settle all transactions at the touch of a button."

Well, up to a point. There is a very low *probability* that the UK will default, but the risks that flow from that very low probability are in fact very high. And in fact we have defaulted, twice. But that is mere pedantry.

Now, #you# know, and #I# know, and I'm sure most of the UK's creditors know too, that your solution is an option; but it doesn't really do to shout it too loudly. If it got out that the current generation of politicians #genuinely# believe that they don't have to give a sh1t about deficits because they can print their way out of trouble, it might make potential investors a bit jumpier. Because it does sound rather like a technical default. Willingness to pay - reputation - is as important as *ability* to pay, after all.

Still, you've got to put your money somewhere, and if the UK is slightly less fucked than the Eurozone, that's good enough, I suppose.

General Zod

Wrong, Neil. We can only settle debts in sterling for as long as the rest of the world is prepared to lend us more sterling. If the market decides it will not buy sterling gilts, then we will have to issue in USD and, as sterling depreciates, those debts will become ever more expensive.

libertarian

@THX1138

I have met with in excess of 800 senior business leaders in South East England in the last two months.

I went to a business conference yesterday with another 150 .

None, not one, zero, zilch has expressed concern that public sector savings would hurt their businesses.

Maybe if you are Crapita or provide Consulting services or common purpose training courses or guardian recruitment advertising you will have a problem. No one else will greatly suffer

libertarian

@Eyesee

Excellent post, totally spot on.

Ivan D

I know this is a sore subject - and I admire Fraser's willingness, in this instance, not to be a Roon flack, and to rightly abuse Osborne - but . . . Fraser, these figures also show one other thing equally clearly. You were wrong too, very wrong in so many of your predictions, preferred forecasts, extrapolations and interpretations. There's post after post, and piece after piece from you bearing this out. Indeed, were I cruel enough to quote from them (yes, I have been sad enough to read through them again), it's painfully obvious that in your campaigning against "Brownies", you did tip over into outright hysteria in places. So shouldn't you, with all due humility, fess up too?

strapworld

Iknow that, sometimes, journalists write articles to stir things up. But this takes the biscuit.

So, Mr Nelson, everything is unkie dorey? Of course it isn't and this kind of tripe can only assist the likes of Brown and Darling and the rest of the labour tribe that created this mess.

Total rubbish!

THX1138

libertarian If you trade with the public sector how can it not hurt your business if the public sector spends less? And it's not just consultancy and IT services.

Peter Hemington partner at BDO who runs "The Business Trends" survey said this yesterday.

"But there is a significant risk that the rhetoric has begun to impact on business confidence, and fears of the economic impact of spending cuts may be causing businesses to rein back on growth plans."

And in the real world, I just got a budget cut from the division of a client that deals with public sector. So that's one more than "zilch" .

Perhaps you should spend less time attending conferences and more time talking to real small businesses. Nobody I know who actually runs a small biz could ever afford the time to attend a conference jolly, they are far too busy dealing with the never ending demands of clients.. You go back to to you tea and biscuits and small talk. I've got a business to run and all the talk of cuts has just put someones job on the line.

Alex

Strapworld, it isn't just Nelson.

The IFs
http://www.ifs.org.uk/publications/5034

The FT (behind payewall)

And the Indy
http://www.independent.co.uk/opinion/commentators/andrew-grice/andrew-grice-the-chancellor-is-overplaying-the-scale-of-the-black-hole-to-shift-blame-for-cuts-on-to-labour-2000516.html

all agree that Osborne is wrong.

The UK is not Greece and the Tories do us a dissrvice by pretending, for party (not national) advantage, that we are.

TK421

@THX1138: You realise of course the irony of protesting at the pressure of running a business while posting on a blog. (I bet you keep checking back thoughout the day to see if you've been published.) And you could have made your point more briefly - thus allowing you to devote more time to your customers - if you had avoided the childish jibe at the end.

yank

Well, not to kibbitz too much, but we here could only DREAM about deficits on the order of 8% of GDP. Try Washington's 10-15% on for size (and this doesn't include the structural deficit, which will run total debt up to the stratosphere).

And then there's the hidden burden of new taxes, fees and regulation coming on-line, to blunt the economic growth that would itself grow us out of that 10% figure, if we fostered growth rather than encumbered it.

You should pack away that Churchill bust, and send one over of Osborne. Or better yet, send him over personally, with a baseball bat for the thick skulls over here (no wood... aircraft aluminum or titanium if you please).

And speaking of printing our way out of the problem, even the yuck yuck guys are starting to get it over here. You guys should enjoy this:

http://www.nbc.com/saturday-night-live/video/china-cold-open/1178451/

Ian C

"GDP is revised down, but the tax haul is revised up. These two apparent irreconcilables can be explained, I am told, because HM Treasury quietly decoupled GDP growth from tax revenue without telling Brown"

This is economic bullshit and leaves one wondering who else has lost their marbles.

You cannot "decouple" GDP Growth from tax revenue. Why would you make GDP projections if it has no bearing on the tax take.

Someone is a) being very stupid/naiive at best and b) gullible.

maddy1

All I know is that I once owned a cow/car and an act of parliament took it away from me!