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How the Chancellor did NOT shrink the deficit

Ben Chu

os laughing 150x150 How the Chancellor did NOT shrink the deficitEd Balls wasn’t the only one bamboozled by George Osborne’s slippery Autumn Statement speech.

I’m afraid that yesterday I initially got the wrong end of the stick when I heard the Chancellor’s extraordinary boast that the deficit was falling.

I thought he was claiming that the Office for Budget Responsibility had revised down its 2012/13 borrowing forecast (which, as I pointed out, the small print of the document demonstrated was not true once all the accounting tricks had been stripped out).

But, of course, the Chancellor was claiming that the OBR was forecasting that the 2012/13 deficit would be lower in cash terms than it was in 2011/12.

Yet I’m pleased to report that I was justified in smelling a rat in Osborne’s claim, even if I erroneously caught a whiff of a different rodent.

The peerless Institute for Fiscal Studies has looked into how the Chancellor was able to flummox everyone by claiming at the Despatch Box that the deficit was falling, even though public borrowing over the first seven months of the financial year has been around £5bn higher than over the same period of 2011/12.

What the IFS found is that the public finances really have deteriorated and that implied borrowing, on the OBR’s own forecasts, should be £131.9bn this financial year, £10.9bn up on the £121bn 2011/12 deficit.

Yet the fact remains that the OBR did forecast total borrowing for 2012/13 of £120bn, even stripping out all the various accounting shenanigans such as the Treasury raid on the Bank of England’s QE coupons and taking the Royal Mail pension assets onto the state’s books. That’s a cash fall in the deficit of £1bn on the deficit in 2011/12.

Graph 1 How the Chancellor did NOT shrink the deficit

So what explains the gap between implied borrowing and the OBR’s latest forecast?

According to the IFS the answer is two somewhat quixotic decisions by the OBR.

First, the OBR has decided to adjust its deficit forecast down in the middle of the financial year by £7.5bn to take into account that government departments have been spending less than their budgets.

Second, the OBR has accepted the word of the Treasury that it will raise £3.5bn from the sale of the 4G phone spectrum early next year.

The £10.9bn gap between implied 2012/13 borrowing and the 2011/12 outturn disappears when these two factors, together worth £11bn, are stripped out:

Graph 2 How the Chancellor did NOT shrink the deficit

In other words the OBR would indeed have projected the 2012/13 deficit to rise in cash terms without these two changes.

So was it reasonable for the OBR to allow its bottom line deficit forecast to be depressed in this way?

People will have different views.

Some say it’s standard Treasury practice to assume auction receipts in advance. And the OBR tells me it only got an estimated figure for the 4G spectrum from the Treasury after March so couldn’t factor the sum into its earlier forecast.

For what it’s worth, the IFS today described the OBR move on counting departmental underspends against the projected deficit as “odd”. And the director Paul Johnson (who incidentally succeeded present OBR chief Robert Chote) asked a pointed rhetorical question:

“Will the OBR set out spending estimates greater than state spending limits in the future if governments start to increase spending regularly as happened in the past?”

In other words, if departments start spending more than expected during a fiscal year, will the OBR revise up its deficit forecasts in future Autumn Statements and thus create a headache for the Chancellor? If the watchdog/forecaster is inconsistent questions over its independence will multiply.

But in any case, neither department underspends nor 4G money have anything to do with how much money the government is raising in taxes from the economy so they cannot reasonably be said to reflect the underlying deficit.

The OBR and the IFS have both worked out what they call “forecast changes” since the March Budget. This is the deterioration in the public finances due to the weakening economy. The difference between the two is that the OBR figures subtract the department underspends. But observe the trend of both:

GRAPH3 How the Chancellor did NOT shrink the deficit

Message? The underlying deficit is rising. Even in 2012/13. And I stand by my verdict that it was disgracefully misleading for George Osborne to imply otherwise this week.

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  • Pacificweather

    How did we know that Osborne was not telling the truth? We saw his lips move.

    I am trying to think back to when the Treasury was last correct about anything and I am struggling to find even one example.

  • http://twitter.com/francessmith frances smith

    that’s very interesting, but i am going to have to read this several times before it makes sense. which is of course why osborne managed to get away with his tricks on the day.

    it will be interesting to watch the autumn statement unravel, just like the budget did.

    at some point cameron is going to have to recognise that he can’t have two liabilities with such important jobs in government, and one of them will have to go, and he can’t sack himself.

  • Pingback: The incredible shrinking capital budget | Ben Chu | Independent Eagle Eye Blogs


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