Hamish McRae: What will the Chancellor do now to make cutting the deficit add up?

Economic View

It has been billed as good news for the Chancellor. We have just had another set of monthly accounts, the last before the Autumn Statement, showing that this year the fiscal deficit is likely to come in below target. We are only just over half-way through the financial year and the big revenue months are still to come, but it looks as though we will be some £10bn-£15bn inside the number that seemed likely in March.

But see this "good news" in context. Our public finances are still in a terrible mess – just slightly less of a mess than they seemed to be at the time of the Budget in March. Getting the country's finances back to an acceptable deficit was supposed to be a four- year job. That slipped three years to become a seven-year one – running well into the next parliament. Now we have clawed back six months or so. In the first year we did reasonably well, cutting about a quarter of the deficit. Then we got stuck, with it only inching down. Now we are on the move again, but there is still a huge way to go. (See graph) Germany, by contrast, is in fiscal balance, a point that Britons and Americans who criticise German economic management might like to note.

The encouraging news is that tax revenues are coming up quite well. Usually in the early stages of a recovery revenues come up fast so this should be of little surprise, but the pause in growth at the end of 2011 and early 2012 meant they rose a little slower that projected. If you look at the three largest categories of revenue and compare with the first seven months of the last financial year, income tax and capital gains are up 5.4 per cent, VAT up 5.8 per cent, and National Insurance a slightly more disappointing 2.1 per cent. So, overall, not too bad a picture compared with the recent past.

The only big tax that is down is corporation tax, down 2 per cent, but we will know more about that by January, for much of it is paid in big lumps at the end of the year. Profits ought to be coming up at this stage so these poor results may be simply reflect conditions a year ago, or there may be structural changes taking place in the way companies try to cut their tax bill. Clearly the Chancellor hopes that by cutting the headline rate of corporation tax, revenues will rise rather than fall, but we will not have any feeling for that for several years. On the other side of the account total current spending is up 2.1 per cent, somewhat below inflation so there is a bit of a squeeze in real terms. Social spending has been controlled quite well, up only 1 per cent companied with last year but there is one charge that the Government cannot escape: the rising interest bill it has pay.

Notwithstanding the still very low interest rates, it paid £5bn in interest in the month of October, up from £4.4bn in October last year. That is just one month. Multiply by 12 and you see the burden – and that is before rates go up.

Those are the numbers; what of the politics of all this? We will see in just under two weeks' time how George Osborne chooses to play it and there will be a couple of obvious things to look for. One will be to what extent a slightly better-than-expected fiscal position allows an easing of the tax burden, or whether the focus will be on speeding up the still-slow correction. If the present progress is maintained next year, he could go into the election having done three-quarters of the job of cutting the deficit, rather than about two-thirds. Alternatively he could use a little bit of the extra room to make some tweaks to taxation – give people a glimpse of the sunlit uplands beyond the present squeeze.

The reason for doing so is that living standards overall are probably still falling – probably rather than definitely because though wage growth is still below inflation, people do have other sources of income and if you allow for that, living standards have broadly stabilised.

The other thing to look for will be the extent to which the Chancellor is prepared to make a bet on strong growth continuing. The new forecast from the Office for Budget Responsibility will show that it expects above-trend growth next year and beyond. The language that the Chancellor uses to acknowledge this will give a signal as to the pitch his party will be making at the election for he is, after all, an acutely political animal. So do you emphasise the growth, or do you stress the scale of the correction still to be done?

The politics are fascinating because they go to the heart of what people really want from fiscal management. Do people still want, to use the nasty word, "bribes"? Do they want tax cuts and/or higher public spending? Or is that old politics and what people now want what Gordon Brown initially promised, which was "prudence"? In other words, is cutting the deficit not merely a necessary evil but actually a popular programme? We know that attitudes to welfare spending have changed radically over the past 30 years, with a clear majority of all voters now believing that such spending is too high. But we don't know whether there has been a parallel shift in attitudes to government borrowing. We may start to catch a sniff of the way the wind is blowing in the next few months.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
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

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003