Budget 2014: The reality is that Osborne still needs us to spend cash, not save it

 

Three months ago George Osborne's watchdog had to move at the speed of a whippet. Robert Chote's team at the Office for Budget Responsibility (OBR) was compelled to make some chunky revisions to its economic forecasts of nine months earlier. Like the rest of the forecasting community, the OBR did not see last year's sharp recovery coming. This time around, though, the OBR has not needed to be so radical.

Its growth forecasts published alongside the Budget were slightly higher than the numbers presented at the time of the Autumn Statement in December. GDP growth is seen coming in at 2.7 per cent this year, rather than 2.4 per cent. In 2015, growth is expected to be 2.3 per cent, up from the 2.2 per cent estimate of last time. The OBR sees the UK retaining the pre-crisis output peak in the second quarter of this year.

Yet these upward growth forecasts haven't had a particularly beneficial impact on the OBR's public finances outlook. The deficit falls a little more rapidly than the OBR expected three months ago. Borrowing in the present financial year will be £108bn, down from £111bn estimated in December. In 2017-18 the deficit will be £16.5bn, rather than £23bn previously.

Read more: The Independent's Budget coverage in full

In 2018-19 the Government will run a surplus of £4.8bn, up from £2.2bn in the last OBR estimate. The national debt will top out lower than expected in December. The OBR now sees a peak in 2015-16 of 78.7 per cent of GDP. Yet that's not enough to allow George Osborne to meet the terms of his original fiscal mandate, for debt to start declining as a share of GDP by the end of this parliament.

What explains this disappointingly small impact of higher growth on the public finances? The answer is that the OBR has become more pessimistic since December about the level of slack in the economy. Its estimate of the "output gap" as a share of GDP in 2014 is now 1.4 per cent in 2014, down from its December estimate of 1.8 per cent. The output gap will finally close in 2018, a year earlier than the OBR anticipated in December.

The OBR explained that it thinks the improvement in the economy over the past year has been almost entirely "cyclical" rather than "structural". What this means is that public borrowing will not automatically fall as the economy returns to full capacity.

This matters for economic policy. It means austerity will grind on for another five years as the Government seeks to bring its books back into balance. Unless, of course, the OBR is wrong about the size of the output gap and the economy actually has more spare capacity. Economists are beginning to grumble that the OBR is being over-pessimistic on slack, pushing politicians into committing to more austerity than is truly needed. "No one really knows how much headroom there is, and the cost of underestimating productive potential in terms of permanently lost output and jobs, not to mention unnecessary austerity measures, would be unacceptably high," Andrew Smith of KPMG said.

What about the impact of the host of tax breaks and spending increases unveiled by George Osborne? In macroeconomic terms they are neither here nor there. The "scorecard" that the Treasury produces at every Budget shows the measures are more or less fiscally neutral: tax cuts are offset by spending cuts, and spending increases by tax rises.

There is no discernible impact of George Osborne's "saving revolution" on the OBR's estimates of people's behaviour. The forecast for the household savings rate is lower than estimated in December. The household debt-to-income ratio continues to rise, more steeply than expected. Part of this is explained by rising house prices.

That points to the paradox (some would say hypocrisy) at the heart of the Chancellor's claim that we "don't save enough". In the wake of the global financial crisis, households' savings ratios shot up as people sought to reduce debts. And it was their willingness to reduce these savings ratios and spend more that underpinned last year's recovery. Though the OBR does expect relatively strong growth in business investment to kick in soon, if its overall forecasts are to add up the consumer will still need to continue doing a lot of work. The inconvenient truth is that George Osborne needs us to save less, not more.

Start your day with The Independent, sign up for daily news emails
Voices
Barn owls are among species that could be affected
charity appeal
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Sport
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
Life and Style
food + drink
PROMOTED VIDEO
News
i100
Arts and Entertainment
a clockwork orange, stanley kubrick
filmSony could have made a cult classic
Life and Style
fashionThe essential guide to all the designer Christmas sale dates
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
news... you won't believe how bad their skills were
News
people

Arts and Entertainment
Mark Wright and Mark Wright
tvStrictly goes head-to-head with Apprentice
Sport
footballPremier League preview: All the talking points ahead of this weekend's clashes
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.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas