The long slog continues. The big message of the Chancellor yesterday was that the Coalition was on course to correcting the deficit it inherited when it came to office. But we are two years in and we are less than a third of the way there. Nothing that the Government can do changes that reality. George Osborne can make some tweaks to the details of tax and spending, and it is helpful that this latest batch has been welcomed by the business community. The Bank of England can print a bit more money. But the only thing that can really make the slog a little easier or a little shorter is faster economic growth. That has proved disappointingly elusive.
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The big numbers remain much the same as they did last autumn. The deficit will be £126bn this year; next year, it will still be £120bn. We started at £150bn, and have to get it down to £20bn or so. We have had some tax rises, and the rest of the gap will have to be closed by lower public spending. As the graph shows, at no stage since 1997, and actually earlier, has a government been able to raise more than 38 per cent of GDP in tax. So spending has to come down to a level similar to what it was in the early years of the Labour government.
That is hugely difficult, and it will put relentless pressure on the spending departments, even those that have been largely protected, such as the NHS. But if you think there is an alternative, consider this. George Osborne said that the deficit would be down to 7.6 per cent of GDP next year. That is still larger than any major country, with the possible exception of the US.
It gets worse. If you look at the detail of the spending plans, more and more of the burden of the cuts comes on investment. Last financial year, the Government's net investment was £38bn. This year it will be £28bn. Next year, it is forecast to be, wait for it, minus £3bn. All that talk of investment in infrastructure has to be set against this reality: in the coming year, we will be cutting the deficit by slashing investment, not by reducing current spending. Why? If the economy grows at less than 1 per cent, it is very hard to cut current spending.
So we have to hope for more growth. There are some tiny changes to the Office for Budget Responsibility forecasts but they remain gloomy about this year, with growth resuming next.
The obvious question is whether the actually pretty modest alterations to corporation tax and the top rate of personal tax in any way change the growth outlook. Realistically, the answer must be No, at least on a two- or three-year horizon, for the lags between any change in tax and any change in economic performance are uncertain and probably quite long. That does not mean they are not worth doing. If these tax changes on the rich bring in an extra £500m, that is fair enough – but it only covers 36 hours of borrowing. It does not change the big picture. If over five years or so, an extra million people are in jobs, as the OBR seems to expect, then that does change things.
According to my back-of-an-envelope tally, that would bring in an extra £10bn a year in income tax and national insurance alone. It is just that we should not expect anything quick to happen.
What we can reasonably hope for is a gradual lifting-off of the economy. The OBR has been over-optimistic in the past but then so too have been the other main forecasters. If you look at not just the UK data but what is happening elsewhere, there are modest hints of an upsurge. British consumers report that they are more optimistic than they have been for a year. The CBI surveys of business opinion have been a little better, and that ahead of the Budget.
Inflation is at last coming down, thereby paving the way for an increase in real household income later this year. Look abroad and the US economy, our largest export market, is putting on jobs at last.
Were it not for Europe and oil – two concerns noted by the Chancellor – the overall outlook would be quite positive. It might seem a rather bleak attitude to say that we have to wait for the rising tide of the world economy to float us off. Governments are supposed to do something, to create budgets for growth,fairness, prosperity – all those nice words. But our experience of the past decade is that this is not the world in which we live. We have a right to hope that the steps taken in this Budget place us in a better position to make progress when global conditions improve – as they probably will in the months ahead.