Andrew Grice: The Chancellor is overplaying the scale of the black hole to shift blame for cuts on to Labour

Tuesday 15 June 2010 00:00

George Osborne prepared the ground for higher tax rises and deeper spending cuts than previously expected in next week's emergency Budget as he seized on the first report from the new independent fiscal watchdog he has set up.

The findings of the Office for Budget Responsibility (OBR) were not quite as bad as they might have been – or perhaps as bad as George Osborne had secretly hoped. But that did not stop the Chancellor telling the Commons: "It is indeed worse than we thought". It seems he has already drafted his Budget speech for a week today and is not going to change it.

His close allies argued the OBR had found that the size of the black hole was bigger than expected, and so the Government would have to go further in order to fill it. Just in case we hadn't got the message, they added an extra layer of black paint ahead of the Budget: Europe's debt crisis means that Britain will need to go faster as well as further.

Ministers seem to judge that they only have one chance to blame the nasty medicine on their inheritance from Labour and they are not going to miss it. They may well cite other OBR findings, such as a net bill for public sector pensions rising by 20 per cent over this five-year Parliament, to justify spending cuts.

In the Commons, Mr Osborne claimed a 2-1 win over his old adversary Alistair Darling because the OBR's growth forecast for next year was lower than the last government's and the underlying structural deficit was bigger than Labour predicted. But Mr Darling claimed a draw, arguing that the OBR had found that public borrowing would come in £30bn lower than expected.

Unless ministers are painting it very black now in the hope that we will all be mightily relieved on the day, they give the impression that next week's news is going to be very nasty indeed. That will only fuel speculation that Mr Osborne will be unable to resist the temptation to raise VAT from 17.5 to 20 per cent, replenishing the Treasury's coffers by a huge £1bn a month.

There is a problem: the Liberal Democrats. Nick Clegg warned during the election campaign that the Tories were planning a £13bn "secret VAT bombshell" which could cost the average household £389 a year. He argued that it would be fairer to raise taxes for the very well-off.

In a speech yesterday, the Liberal Democrat leader made a forceful defence of so-called "progressive cuts", no doubt anticipating the flak from Labour that will come his way on Budget day. He has already made one significant U-turn by backing immediate spending cuts (after joining Labour in opposing them during the election). Having to swallow a VAT hike would be a mouthful too far for many Liberal Democrats. Some would like tax rises to fill a bigger share of the "black hole" than the 20 per cent planned by Mr Osborne (with spending cuts filling 80 per cent) and would prefer the one-third (tax rises) and two-thirds (cuts) envisaged by Labour. But not from higher VAT.

Mr Clegg argued that doing nothing about the deficit would not be "progressive". His hope is that his party can shape a "fairness agenda" for the coalition once the deficit has been tackled. But his problem is that a VAT rise would be regressive, since the poorest fifth of households are said to spend twice as much of their disposable income on VAT as the richest fifth. Convincing us that a 20 per cent VAT rate is progressive would be a hard task.

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