George Osborne's billion pound drop: 4G auction falls short of Treasury's budget

The Chancellor's plan to reduce the deficit relied on a hefty windfall from the sale of the 4G spectrum. But it hasn't worked out that way. So where does that leave the public finances?

The Chancellor stunned the House of Commons – and economists – in December when he stood at the  Dispatch Box and boldly claimed that the Government’s fiscal deficit would fall this year. This was surprising because in every month since the beginning of the financial year in April 2012, official figures had shown public borrowing to be higher than in the corresponding month of the previous financial year, as the economy sank into a double-dip recession.

Wednesday did not bring good news for Mr Osborne: the Government, it was announced, had raised only £2.3bn from phone companies in the auction of 4G mobile phone licenses – casting fresh doubt on the Chancellor’s claim to be cutting the fiscal deficit in 2012/13.

When he made the claim, Mr Osborne had the support of the Treasury watchdog, the Office for Budget Responsibility. Total public borrowing, which came in at £121.4bn in 2011/12, was on course to register a modest fall to £119.9bn in 2012/13, the OBR said.

So how could this be possible given that the state’s borrowing bill had been growing month after month? An examination of the small print revealed that the watchdog had done two unusual things.

First, the OBR had assumed that government departments would spend £7.5bn less than their allotted budgets by the end of this year.

Second, it had assumed that the Treasury would raise £3.5bn from the 4G auction. (Some City analysts predicted it could hit £5bn.)

True, no one expected the mobile phone auction to raise anywhere near the staggering £22.5bn from the sale of 3G licences in 2000. In fact, the 4G sale had been carefully arranged to ensure that bidding would not spiral out of control again – which would ultimately hit consumers, through rising mobile phone bills. The 4G flop is good news in that regard, at least. But it leaves Mr Osborne desperately struggling to meet his commitment to cut the deficit.

Without the Chancellor’s neat trick – the two assumptions that hard-pressed Whitehall departments would spend even less than expected, and that the mobile phone auction would hit the £3.5bn target – this year’s deficit would instead have been projected to hit £131.9bn, up by almost £11bn.

Mr Osborne would have had to admit that public borrowing was actually increasing – a political embarrassment for the “austerity Chancellor”.

The announcement that the 4G auction has produced less than the Treasury and the OBR expected heightens the risk that the Chancellor will have to stand up in the Commons when he unveils his March Budget and announce that the deficit has instead grown in cash terms.

The OBR’s arguably generous assumptions last December left the Chancellor with only a tiny margin of £1.5bn with which to make good his claim of falling borrowing.

That has now been almost wiped out by the £1.2bn shortfall on the expected 4G revenues. And it would take only a further modest shortfall in tax revenues, or a slight increase in departmental spending relative to expectations, over the final four months of the financial year to wipe out this margin entirely.

The signs are not hopeful for the Chancellor. In December, government expenditure was slightly above the OBR’s forecasts for the remainder of the financial year and tax receipts were slightly below. We should get a clearer idea of the situation from the public finances figures for January, which will be released this morning. January is normally a bumper month for tax revenues because companies pay their corporation tax and individuals file their self-assessment income tax returns. Another severe disappointment here on revenues and the Chancellor’s deficit reduction hopes will be blown out of the water.

So why did the OBR get it wrong on the 4G auction, which was supposed to boost our public coffers? The watchdog points out that to make its estimate it used independent industry analyses, which were based on comparable 4G sales abroad. And it had always made clear that the projected revenues were “an area of particular uncertainty”.

But not everyone is convinced by that defence. John Redwood, the Conservative MP for Wokingham, said that the 4G error fits a pattern of the official forecaster being over-optimistic about Government revenues. “You can’t blame the Chancellor for it,” he told the BBC. “He deliberately made an independent budget office who are meant to know about these things and I’m afraid they’ve been consistently wrong.”

Whatever view one takes on the quality of the 4G auction forecasts, one thing is plain: the Chancellor’s chances of being able to stand up on Budget day next month and again stun the Commons by announcing that public borrowing is still falling have become much slimmer.

Ed Richards, Ofcom chief executive, said: “This is a positive outcome for competition in the UK, which will lead to faster and more widespread mobile broadband, and substantial benefits for consumers and businesses across the country. We are confident that the UK will be among the most competitive markets in the world for 4G services.

“4G coverage will extend far beyond that of existing 3G services, covering 98 per cent of the UK population indoors - and even more when outdoors - which is good news for parts of the country currently under-served by mobile broadband.”

Vodafone UK chief executive Guy Laurence said: “We’ve secured the low frequency mobile phone spectrum that will support the launch of our ultra-fast 4G service later this year. It will enable us to deliver services where people really want it, especially indoors. This is great news for our customers.”

Two forms lost their bids for licences: Hong Kong Telecom owner PCCW and private-equity backed Buckinghamshire-based firm MLL, which supports fixed and wireless services in the UK.

Telefónica’s deal requires it to provide coverage to 98 per cent of the UK population and at least 95 per cent of the population in each of the UK nations - England, Northern Ireland, Scotland and Wales - by the end of 2017 at the latest. BT said it did not intend to build a national mobile network.

BT chief executive Ian Livingston said: “Instead, this spectrum will complement our existing strategy of delivering a range of services using fixed and wireless broadband. We want our customers to enjoy the best possible connections wherever they are and this spectrum, together with our investment in fibre broadband, will help us achieve that.”

Olaf Swantee, chief executive of EE, said: “The acquisition of low and high frequency spectrum allows us to boost our superfast data services and coverage - indoors and outdoors, in cities and the countryside.

“This result means that we are perfectly placed to meet future data capacity demands - further enhancing the superfast 4G services we already offer the UK’s consumers and businesses.”

Ofcom predicted that demand for the mobile data could be 80 times higher than it is today by 2030 and it was planning for a further spectrum for possible future 5G mobile services. 4G services should make it much quicker to surf the web on mobiles, giving speeds close to home broadband services and allowing consumers to stream high-quality video, watch live TV and download large files.

Q&A: Long-term evolution - opening up the airwaves

Q. What is 4G?

A. It is short for fourth-generation mobile networks. 4G uses sophisticated technology known as LTE, or Long Term Evolution, which means much greater volumes of data can travel on existing frequencies.

Q. Why does it matter?

A. 4G allows super-fast mobile broadband, at speeds of up to 10 times the present 3G networks. It means watching video, surfing the web and making mobile payments will be smoother.

Q. Why was there an auction?

A. Spectrum has become available, thanks in part to the switching off of analogue TV. Ofcom manages the airwaves and wanted a wide range of 4G operators, allowing plenty of choice for consumers.

Q. Who won what and how much did they spend?

A. Five players spent £2.34bn. The existing pecking order with the “Big Three” remains largely intact as they spent the most. Vodafone paid £791m, EE (which includes T-Mobile and Orange) £589m, and O2 £550m. Three, the UK’s fourth and smallest mobile player, stumped up £225m. BT also emerged as a niche player, grabbing a slice for £186m.

Q. Why is BT getting into 4G when it doesn’t have a mobile network?

A. Britain’s biggest telecom company doesn’t offer mobile to consumers — it spun off Cellnet, which became O2, more than a decade ago — but it wants 4G for its corporate mobile customers. Some consumers should also get a better broadband signal as 4G can boost a wireless fixed-line service such as Wi-Fi.

Q. Why didn’t the auction raise more money?

A. Everyone knows the mobile companies overpaid when the 3G auction in 2000 brought in £22.5bn. Ofcom arranged this auction so bids did not rocket out of control — partly so that consumers would not be landed with much higher bills.

Q. Was George Osborne over-optimistic when he pencilled in a £3.5bn windfall?

A. Perhaps. But the mobile market is complicated and a similar auction in the Netherlands, a much smaller country, smashed forecasts and brought in £3bn last December. Ofcom ensured the UK auction was calm and steady.

Q. Is it bad news if the Treasury only got £2.34bn?

A. Not for consumers. Mobile operators will not have to pass on big costs, so all of us face less of a rise in phone bills. This should be good for Britain’s economic prospects as mobile and broadband play an increasingly important part in our lives.

Suggested Topics
News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
Life and Style
ebooksA superb mix of recipes serving up the freshest of local produce in a delicious range of styles
Life and Style
ebooksFrom the lifespan of a slug to the distance to the Sun: answers to 500 questions from readers
New Articles
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
News
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
i100
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
booksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Gadgets & Tech

    SQL Technical Implementation Consultant (Java, BA, Oracle, VBA)

    £45000 - £55000 per annum + Benefits + Bonus: Harrington Starr: SQL Technical ...

    Lead C# Developer (.Net, nHibernate, MVC, SQL) Surrey

    £55000 - £60000 per annum + Benefits + Bonus: Harrington Starr: Lead C# Develo...

    Project Manager – Permanent – Circa £40k – West Midlands

    £35000 - £45000 Per Annum Plus excellent benefits: Clearwater People Solutions...

    Senior Project Manager / Team Leader (Management, Digital, Websites)

    £55000 - £60000 Per Annum + benefits: Clearwater People Solutions Ltd: Senior ...

    Day In a Page

    'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

    'I’ll tell you what I would not serve - lamb and potatoes'

    US ambassador hits out at stodgy British food
    Radio Times female powerlist: A 'revolution' in TV gender roles

    A 'revolution' in TV gender roles

    Inside the Radio Times female powerlist
    Endgame: James Frey's literary treasure hunt

    James Frey's literary treasure hunt

    Riddling trilogy could net you $3m
    Fitbit: Because the tingle feels so good

    Fitbit: Because the tingle feels so good

    What David Sedaris learnt about the world from his fitness tracker
    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Second-holiest site in Islam attracts millions of pilgrims each year
    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering