By Andrew Smith, chief economist at KPMG
Having decided to de-politicise the Treasury’s projections for the economy and government finances by subcontracting them to the independent Office for Budget Responsibility, the Chancellor has little option but to take its prognostications on the chin.
But after last year’s roller-coaster ride, when bullish projections in March had given way to a decidedly downbeat assessment by November, Mr Osborne must be hoping for a bit more stability in the run up to this year’s Budget.
And he is likely to get it. With only a few months’ new hard data available, there seems little reason to change significantly November’s review. This halved estimated 2011 growth to 0.9%, knocked almost two percent off this year’s forecast to 0.7% and projected a continued weaker recovery until 2015.
This downgraded outlook, in turn, resulted in significant upward revisions to public borrowing — of more than a cumulative £100 billion by the end of the Parliament. To meet his fiscal rules, the Chancellor pencilled in further spending cuts, totalling some £23 billion, in 2015-2017. With these adjustments, the current budget was projected to just meet the target of balance or surplus within (a rolling) five year time-frame, and net debt to still peak as a percentage of GDP by 2015 as pledged.
Ironically, it now looks as if this financial year’s borrowing is on track to undershoot not only November’s upwardly revised estimate but also the original March one. What should the Chancellor do if, as some now expect, he turns out to be up to £10 billion better off than thought?
£10 billion is a not inconsiderable sum — sufficient to knock 2-3p off the basic rate of tax, or reduce the standard rate of VAT to 18%, for example — but maybe the lesson to draw is that forecasting the public finances is subject to a wide margin of error. The Chancellor may conclude it is better not to loosen fiscal policy on the back of a short-term improvement, which would be consistent with his decision not to tighten policy immediately when faced with the sharp long-term deterioration last November.
What can we expect? Even if Mr Osborne takes a cautious approach to the public finances there is still scope for some redistribution towards areas which will give most bang per buck, for example investment incentives and tax cuts for the lower paid. Certainly more detail is expected on last year’s growth measures, such as Credit Easing and the National Infrastructure Plan.
There are also likely to be more low-cost measures such as abolition of red tape and to improve labour market flexibility. But in the short-term, as long as the Chancellor insists on sticking to “Plan A”, there is little scope to radically alter the (at best) sluggish outlook for the economy.
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