Fraser Nelson Fraser Nelson

Osborne’s “flexibility” explained

So what does George Osborne mean by “flexibility“? Do we hear the quiet sound of a gear change, prior to a u-turn? No, I’m told, it’s Plan A all the way. And here are the details.

The government’s five-year departmental budgets (the so-called DEL limits) are set in stone. They won’t change (in cash terms) until April 15, after which no figures have been set. If inflation continues to be high, then this will exacerbate the real effect of the cuts (Osborne has already seen trouble caused by with this as inflation has turned the tiny NHS budget increase into a tiny NHS budget decrease). The OBR reckons it may deepen them from 13 per cent to 19 per cent.”

What might change is the cost of debt and dole. This can’t be budgeted for: you never know how many folk will claim. But the greatest need for flexibility is on debt interest. About 22 per cent of UK gilts are inflation-linked, so the taxpayer will have to shell out billions more as inflation continues to rampage. The Bank of England’s failure to control inflation has increased the cost of repayments by more than £5bn over the last few months alone, according to the small print of the last budget. Coffee House was alone in reporting this.

This obviously affects the deficit. Money to pay for increasing debt has to come from somewhere. So total state spending will rise in cash terms because the departmental budgets are fixed. This threatens to slow pace of deficit reduction.

So yes, Osborne needs flexibility. But his target is to eliminate the cyclically-adjusted “structural deficit”, which is not the same as the deficit (see graph below).

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