This morning’s newspapers have a feast of analysis on the Budget. I’ve covered 15 of
them, and what journalists normally do is spend the day trawling the small print of the Budget document hunting for stories. But this time, the stories seem to have migrated to the Office for
Budget Responsibility’s accompanying report, packed with new analyses and metrics —
even disaster scenarios — which those with an interest in UK economics will find useful. The OBR document is now released with the Red Book, and speaks with the authority of government
economists who (unlike the rest of us) have had weeks to chew over Osborne’s claims. The OBR must now be considered part of the Budget’s small print. For those who are into that kind of thing, here
are some points that jumped out at me:
1) Rejects Osborne’s growth claims. Cameron said this would be the most “pro-growth budget for a generation”. The OBR is not convinced. From Box 3.1. “Some [Budget] measures could affect growth. However, there remains significant uncertainty around the size of its effects …. We judge that there is insufficient evidence at this stage to adjust our trend growth assumptions.” So the Chancellor declares that he has put fuel in the tank of the British economy, but a forensic analysis published by the OBR explicitly disagrees. But given that the OBR has the DNA of the Brownite Treasury, it’s more than possible that it simply doesn’t believe in supply-side economic reform.
2) The cost of Croatia, and our EU membership. The OBR estimates that “the expected accession of Croatia in 2013 … could cost the UK up to £200 million per year in the long run.” Not something you’ll hear William Hague admit. The EU may be forced to tighten its belt in the 2014-20 spending round, says the OBR, but it will let spending rip beforehand.
3) Some 20,000 fewer public sector job cuts. The OBR is also in the business of making a guess about how many public sector jobs will be axed — which can make front page news. It forecasts that for every public sector job that is lost, some 3.25 jobs will be created in the economy. In total: 1.3 million more jobs in the private sector, and 400,000 fewer in the public sector. But it has softened its forecasts, and expects 5.36m such workers in 2014-15, not 5.71m. (Box 3.6).
4) The Killer Inflation Scenario. What happens if inflation doesn’t go down? The OBR does a little war-gaming. If inflation stays above 4 per cent for longer, then base rates would shoot up to 6 per cent, but (it thinks, in table 3.10) employment wouldn’t be hit much. Departmental spending cuts would, in real terms, deepen from 13 per cent to 19 per cent, The OBR itself is optimistic saying it expects “CPI inflation to fall back swiftly in the final quarter of 2011” Mervyn King expected inflation to fall away too, and it didn’t. And that landed us with…
5) The £4.7 billion debt interest bombshell. Many government debt notes (about a third, I’m told) are inflation linked — so when RPI rises, so does the interest it pays on its debt. In 2011-12, the estimated bill for debt interest will be £48.6 billion — a staggering £4.7 billion more than the estimate in the November forecast. This is like a new Afghan war.
6) Osborne’s £3.4 billion bank windfall. If you’d flog the banks now, we’d be £1.6 billion in the red, it says (Box 4.2). But the scenarios they are looking at “imply an estimated eventual benefit to the taxpayer of £3.4 billion”. Not much, when you remember that Brown raised £22 billion from the 3G auctions. The coming 4G auctions (which raised €4.4 billion for Germany) may land Osborne more than flogging the banks.
7) New! Earnings forecasts. The old Treasury never used to give any, arguing that this would interfere with pay negotiations. The OBR is more forthcoming. So we can see very useful forecasts: that wage growth won’t keep catch up with CPI inflation until the end of next year, and RPI inflation by mid-2013. Result: real wage falls, real drop in living standards and real misery.
8) The 50p tax. Last month, when bumper tax receipts came in, I blogged that this was because high earners were sucking forward their income in tax for the 2009-10 financial year (paid in Jan11). The OBR appears to agree, saying that the “particularly strong” receipts represent forestalling “ahead of the introduction of the 50p tax rate.”
9) An odd £700m increase in ‘single use military expenditure’. This isn’t explained properly, and I doubt it’s the bill for those Tomahawks being sent down Libyan chimneys, because it’s for the 2011-12 financial year which begins on 5 April. I’ll update you if I find out more.
10) Trouble expected for IDS welfare reform. The OBR has changed its assumptions about how smoothly the IDS welfare reforms will go, and how many people will appeal. Expecting trouble, it has upped the welfare bill (by £400m in 2012-13) as a result.
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