Chancellor gets away with it but pain is postponed

This fiscal tightening will roll back the frontiers of the state, but does it in the end go far enough? Sean O'Grady reports

This was indeed the toughest Budget since the Second World War. The Chancellor announced a total fiscal tightening – including the cuts and tax hikes announced by his Labour predecessors – of £120bn by 2015, according to some estimates. Even that number shrinks in comparison to the £425bn by which the Chancellor claimed Labour had missed its old fiscal rules. Instead, Mr Osborne announced a new "fiscal mandate" – "that the structural current deficit should be in balance in the final year of the five-year forecast period" (which is 2015-16 in this Budget) – and he set out how he would meet it.

That structural deficit – the part that will not disappear as a result of a return to growth – is being put by the Office for Budget Responsibility and Treasury at 8.7 per cent of GDP, contributing to the largest proportionate annual government borrowing of any EU nation expect Ireland. Mr Osborne's ambitious plans will turn that structural deficit into a small surplus on current spending – wages and so on rather than investment in, say, roads – of 0.3 per cent and 0.8 per cent in 2015 and 2016 (there will still be borrowing when capital spending is accounted for). The majority of the squeeze, as the Conservatives promised in the election, will consist in cutting spending rather than increasing taxes: 77 per cent will come from spending cuts, 23 per cent from tax changes.

In headline terms, public borrowing is projected to fall from £149bn (10.1 per cent of GDP) to £20bn (1.1 per cent) in 2015/16.

Although 2016 is a long way away, Mr Osborne signalled his earnestness by the rise in VAT announced for 4 January next year. Unlike any planned cuts to public expenditure, which the markets might discount, a rise in VAT yields immediate returns, in this case of about £13bn a year. Coupled with Labour's other tax rises, such as the new 50p rate, and some of Mr Osborne's own, such as the rise in capital gains tax, the tax burden will rise to 38.8 per cent of GDP by 2014.

The £11bn reduction in the welfare bill through capping housing benefit and freezing child benefit was one of the few clues to Mr Osborne's plans for individual departmental spending. The full truth about the cuts will be revealed in the spending review in the autumn, but the welfare changes suggest that the Government is unafraid of unpopular decisions.

Total public sector net debt, colloquially termed the national debt, will now peak at 70.3 per cent of GDP in 2013/14, rather than at just below 75 per cent under Labour' s plans. In cash terms it will hit £1,316bn at its highest point. In historical terms though, that is some way below the 262 per cent of GDP that the UK's national debt peaked at, in 1946, as well as the near 200 per cent debt pile in Japan.

Although Mr Osborne didn't publish detailed departmental plans, he confirmed independent estimates from the Institute for Fiscal Studies that spending cuts in departments that have not been protected by specific pledges will amount to 25 per cent, rather than the 20 per cent that was implied in Labour's policies.

Overall, the Government is planning real-term cuts to departmental expenditures over the next five years adding up to a total of 10 per cent. Protecting areas such as overseas development and NHS spending and restoring the earnings link to pensions mean that the squeeze in other, unprotected areas will be that much heavier. Transport, housing and schools are usually mentioned as the areas most vulnerable to the axe.

The sharp reduction in Labour's plans for capital spending will be retained, but not extended. Thus the stress is now on the "current" side of spending, and that will mean continuing restraint on the wages bill and benefit payments, both given plenty of attention by Mr Osborne yesterday. Rightly or wrongly, Mr Osborne is certainly set on a course that will roll back the frontiers of the state, to borrow an older Tory slogan. The share of total public expenditure to national income is planned to fall from around 47 per cent currently (and over 50 per cent on some international definitions), to less than 41 per cent by 2014/15.

Dr John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development, commented: "Economic growth will slow by far more than today's Budget suggests and, rather than peaking at 8 per cent this year, unemployment will continue to rise toward 3 million (10 per cent) by the time Mr Osborne's measures take full effect. This will add to public borrowing and debt, not reduce it."

Yet while many liberal economists were dismayed by the Budget, some argued that the ageing population and diminishing flow of younger immigrants into the UK mean that the Government ought to have done more rather than less to repair the finances and prepare the nation for any future financial shocks.

The National Institute of Economic and Social Research commented: "Today's plans are a credible attempt to eliminate the structural budget deficit. They also begin to address longer-term public finance issues. Nevertheless in the longer term the budget needs to be tightened further if the economy is to be suitably prepared for another economic crisis like that of the last two years and is also to make adequate provision for an ageing population."

The Economy: Osborne crosses fingers that his destiny is in his own hands

The Chancellor may be correct in stating that the independent Office for Budget Responsibility agrees he is "on track" to bring the public finances back into balance by 2016. But the OBR is also clear that George Osborne's programme will mean lower growth, higher unemployment and lower living standards than would have been the case under Alistair Darling's plans.

The changes are not dramatic from the last time the OBR reviewed the economy. The growth forecast has been trimmed to 1.2 per cent from 1.3 per cent, while the 2011 projection has been cut to 2.3 per cent from 2.6 per cent. The 2012 figure is unchanged at 2.8 per cent while the 2013 and 2014 projections are edged up to 2.9 per cent (from 2.8 per cent) and 2.7 per cent (from 2.6 per cent). What will this mean in real, human terms?

Unemployment will be about 30,000 higher this year as a result of cuts to public spending, as some forecasters predicted. The OBR says it will peak at 8.1 per cent, but fall to 6.5 per cent by 2014 – around 100,000 more jobless than might have been expected under Labour's policies, though the coalition claims continued higher borrowing would have triggered a Greek-style crisis.

Yet some economists warn that unemployment could go much higher. James Knightley of ING commented: "Unemployment is likely to remain high. The Chartered Institute of Personal Development is warning of up to 725,000 public sector job losses resulting from fiscal austerity.

"During the last period of significant fiscal austerity in the 1990s more jobs were lost, but these were absorbed by a vibrant private sector. This time the prospect of three million unemployed is still a risk, which has the potential to feed back and further depress activity."

Most miserably of all for a nation grown used to substantial increases in its living standards, the OBR say that household consumption will rise by a minimal 0.2 per cent this year and 1.3 per cent next: then again, raising a tax on consumption, such as VAT, is supposed to be part of the "rebalancing" of the economy towards exports and investment, both of which are set to bounce back. Much depends now on inflationary expectations and pay rises. The latest surveys from the Bank of England suggest that inflationary expectations are starting to become "de-anchored" from the official two per cent target, which will worry the Bank, especially with a rise in Vat pending. In his Mansion House speech, Governor Mervyn King said: "If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond."

Mr Osborne will be hoping Mr King keeps his word and that events in the eurozone and the banking world don't upset their plans.

News
people
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvDownton Abbey review: It's six months since we last caught up with the Crawley clan
Sport
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
PROMOTED VIDEO
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Sport
premier league
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Sport
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
News
ebooksAn unforgettable anthology of contemporary reportage
News
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
News
i100
News
i100
Sport
Plenty to ponder: Amir Khan has had repeated problems with US immigration because of his Muslim faith and now American television may shun him
boxing
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.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments