'Rollercoaster' warning on spending
George Osborne's pledge to end austerity a year earlier than expected will only be met by a tighter squeeze on public spending in the nearer term, official forecasts showed today.
The independent Office for Budget Responsibility (OBR) said the Chancellor's plans implied a "rollercoaster profile" for public services over the next few years with a deeper tightening for 2016/17 and 2017/18 before a sharp spending rise in 2019/2020.
Mr Osborne's pledge to cut short austerity appeared designed to blunt the political impact of analysis of his previous plans to shrink Britain's deficit which would have seen relative state spending shrink to a level not seen since the 1930s.
The Coalition had been stung by suggestions that his squeeze raised the spectre of a bleak future for Britain comparable to the poverty described in George Orwell's pre-war Road To Wigan Pier.
Delivering his Budget today, the Chancellor said new plans would mean state spending as a share of national income the same size as Britain had in 2000 - when Labour was in office - but before, Mr Osborne said, "spending got out of control".
Mr Osborne used his speech to trumpet OBR forecasts published at the same time showing an improved picture for the UK economy with a better outlook for growth and borrowing £5 billion less than expected over the next three years.
The official predictions also saw the national debt starting to fall earlier than had previously been thought.
Mr Osborne said: "This is a Budget that takes Britain one more big step on the road from austerity to prosperity.
"Because the national debt share is falling a year earlier than forecast at the Autumn Statement, the squeeze on public spending ends a year earlier too.
"In the final year of this decade, 2019-20, public spending will grow in line with the growth of the economy. We can do that while still running a healthy surplus to bear down on our debt."
The OBR said policy decisions announced in the Budget meant that public spending as a share of gross domestic product (GDP) would no longer be expected to fall to a post-war low in 2019/20.
But borrowing would be lower in every year than had been expected its December forecast while the "fiscal mandate" to borrow only to pay for investment - adjusted for the state of the economy - would be met with "room to spare" in 2017/18.
Meanwhile, national debt as a proportion of GDP is set to start to fall from 2015/16, not 2016/17 as previously thought.
However, policy decisions in the Budget were "not expected to have a material impact on the economy".
Instead, the OBR said the Government had achieved the improvements by tightening the assumed squeeze on public spending through to 2018/19, dropping the cut in spending pencilled in for 2019/20 and announcing the sale of £20 billion of assets next year.
It said: "This leaves a rollercoaster profile for implied public services spending through the next Parliament: a much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years followed by the biggest increase in real spending for a decade in 2019-20."
The OBR said implied spending on public services in 2019/20 has been revised up by £28.5 billion, with an axe taken to projections at the time of December's Autumn Statement that the Treasury would run a £23.1 billion surplus that year.
Mr Osborne said Britain was coming "out of the red and into the black" as he outlined further savings of £30 billion that would be needed by 2017/18.
He said £13 billion would be slashed from Government departments, with an additional £12 billion to be achieved from welfare savings and £5 billion by tackling "tax avoidance, evasion and aggressive tax planning".
"We have done it in this Parliament, we can do it in the next," Mr Osborne said.
OBR forecasts revised down expected underlying borrowing, which stood at £97.5 billion in 2013/14, to £90.2 billion for the current fiscal year to the end of this month. It had been forecast at £91.3 billion in December.
For 2015/16, it has been cut from £75.9 billion to £75.3 billion and in 2016/17 from £40.9 billion to £39.4 billion. The deficit for 2017/18 is expected at £12.8 billion down from £14.5 billion.
A surplus is forecast in 2018/19 of £5.2 billion, up from £4 billion, and again in 2019/20, but this is sharply revised down from £23.1 billion to £7 billion as plans for austerity are cut short.
Meanwhile, debt as a proportion of GDP is expected to fall in the next fiscal year to 80.2% after a forecast 80.4% for 2014/15, before continuing to decline.
Mr Osborne said this would mean he meets the debt target set out in his first Budget, with the current Parliament ending with Britain's national debt share falling.
The OBR's forecast for 2016 growth is upgraded from 2.2% to 2.3%, but for 2017 it is downgraded from 2.4% to 2.3% while for 2018 it remains at 2.3%. In 2018 it is expected at 2.4%, up from 2.3%.
However it said the upward revision for growth was tempered by a weaker outlook for export market growth and the effect of lower oil prices of production and investment in the North Sea.
Budget measures were overall neutral on the public finances, with a £4.4 billion boost over five years from raising the bank levy and a series of other measures boosting the public finances balanced out by giveaways elsewhere.
Further increases in the income tax personal allowance will cost £5.7 billion over the period while tax measures benefiting savers lose the Government £3 billion and a subsidy for first-time buyers, £2.2 billion.
Mr Osborne said GDP per capita figures showed people were better off now than they were five years ago while separate data on living standards also showed an expected increase for this year on 2010.
Improvements to public finances have been boosted by lower inflation, meaning index-linked debt payments on Government bonds are expected to be £35 billion lower than they were a few months ago, the Chancellor revealed.
Inflation - at a record low of 0.3% and expected to fall further - has been lowered by tumbling world oil prices as well as the supermarket price war.
Treasury coffers are also boosted by £3 billion a year from lower unemployment meaning less paid out in benefits, plus £13 billion from a sell-off of assets from bailed out Northern Rock and Bradford & Bingley.
Mr Osborne also said at least a further £9 billion of shares in rescued Lloyds bank is to be sold in the coming year.
He said it would be "deeply irresponsible" to use this as a windfall, with the resources from the bank sales, lower interest payments and lower welfare bills instead to be used to pay down the national debt.
The Chancellor said: "We put economic security first."
Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "Chancellor George Osborne has stuck to his word and delivered a fully-funded budget despite the fact that an election is just around the corner.
"Clearly he decided that it would play better with the electorate to emphasise his fiscal prudence rather than resort to some blatant pre-election bribery.
"The Chancellor has scaled back the spending cuts a bit, ending them a year early. But that still leaves four years of deep spending cuts to get through first.
"Indeed, the big picture is that the fiscal squeeze is still only halfway through, meaning that interest rates will need to remain very low throughout most of the next parliament."
John Longworth, director general of the British Chambers of Commerce, said: "It appears that the Chancellor has pulled off a difficult balancing act, maintaining fiscal discipline while ensuring that necessary deficit reduction doesn't undermine the UK's growth prospects.
"Yet the Chancellor avoided the temptation to use new-found windfalls for gimmicks. His focus on fiscal responsibility will play well with business audiences."
The Institute of Directors said: "This was a solid and responsible budget.
"Few Chancellors would be able to resist the temptation to binge on a £22bn windfall from the sale of bank shares this close to an election. By using it to pay down our national debt George Osborne has shown commendable discipline."
George Osborne's pledge to end austerity a year earlier than expected will only be met by a tighter squeeze on public spending in the nearer term, official forecasts showed today.
The independent Office for Budget Responsibility (OBR) said the Chancellor's plans implied a "rollercoaster profile" for public services over the next few years with a deeper tightening for 2016/17 and 2017/18 before a sharp spending rise in 2019/2020.
Mr Osborne's pledge to cut short austerity appeared designed to blunt the political impact of analysis of his previous plans to shrink Britain's deficit which would have seen relative state spending shrink to a level not seen since the 1930s.
The Coalition had been stung by suggestions that his squeeze raised the spectre of a bleak future for Britain comparable to the poverty described in George Orwell's pre-war Road To Wigan Pier.
Delivering his Budget today, the Chancellor said new plans would mean state spending as a share of national income the same size as Britain had in 2000 - when Labour was in office - but before, Mr Osborne said, "spending got out of control".
Mr Osborne used his speech to trumpet OBR forecasts published at the same time showing an improved picture for the UK economy with a better outlook for growth and borrowing £5 billion less than expected over the next three years.
The official predictions also saw the national debt starting to fall earlier than had previously been thought.
Mr Osborne said: "This is a Budget that takes Britain one more big step on the road from austerity to prosperity.
"Because the national debt share is falling a year earlier than forecast at the Autumn Statement, the squeeze on public spending ends a year earlier too.
"In the final year of this decade, 2019-20, public spending will grow in line with the growth of the economy. We can do that while still running a healthy surplus to bear down on our debt."
The OBR said policy decisions announced in the Budget meant that public spending as a share of gross domestic product (GDP) would no longer be expected to fall to a post-war low in 2019/20.
But borrowing would be lower in every year than had been expected its December forecast while the "fiscal mandate" to borrow only to pay for investment - adjusted for the state of the economy - would be met with "room to spare" in 2017/18.
Meanwhile, national debt as a proportion of GDP is set to start to fall from 2015/16, not 2016/17 as previously thought.
However, policy decisions in the Budget were "not expected to have a material impact on the economy".
Instead, the OBR said the Government had achieved the improvements by tightening the assumed squeeze on public spending through to 2018/19, dropping the cut in spending pencilled in for 2019/20 and announcing the sale of £20 billion of assets next year.
It said: "This leaves a rollercoaster profile for implied public services spending through the next Parliament: a much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years followed by the biggest increase in real spending for a decade in 2019-20."
The OBR said implied spending on public services in 2019/20 has been revised up by £28.5 billion, with an axe taken to projections at the time of December's Autumn Statement that the Treasury would run a £23.1 billion surplus that year.
Mr Osborne said Britain was coming "out of the red and into the black" as he outlined further savings of £30 billion that would be needed by 2017/18.
He said £13 billion would be slashed from Government departments, with an additional £12 billion to be achieved from welfare savings and £5 billion by tackling "tax avoidance, evasion and aggressive tax planning".
"We have done it in this Parliament, we can do it in the next," Mr Osborne said.
OBR forecasts revised down expected underlying borrowing, which stood at £97.5 billion in 2013/14, to £90.2 billion for the current fiscal year to the end of this month. It had been forecast at £91.3 billion in December.
For 2015/16, it has been cut from £75.9 billion to £75.3 billion and in 2016/17 from £40.9 billion to £39.4 billion. The deficit for 2017/18 is expected at £12.8 billion down from £14.5 billion.
A surplus is forecast in 2018/19 of £5.2 billion, up from £4 billion, and again in 2019/20, but this is sharply revised down from £23.1 billion to £7 billion as plans for austerity are cut short.
Meanwhile, debt as a proportion of GDP is expected to fall in the next fiscal year to 80.2% after a forecast 80.4% for 2014/15, before continuing to decline.
Mr Osborne said this would mean he meets the debt target set out in his first Budget, with the current Parliament ending with Britain's national debt share falling.
The OBR's forecast for 2016 growth is upgraded from 2.2% to 2.3%, but for 2017 it is downgraded from 2.4% to 2.3% while for 2018 it remains at 2.3%. In 2018 it is expected at 2.4%, up from 2.3%.
However it said the upward revision for growth was tempered by a weaker outlook for export market growth and the effect of lower oil prices of production and investment in the North Sea.
Budget measures were overall neutral on the public finances, with a £4.4 billion boost over five years from raising the bank levy and a series of other measures boosting the public finances balanced out by giveaways elsewhere.
Further increases in the income tax personal allowance will cost £5.7 billion over the period while tax measures benefiting savers lose the Government £3 billion and a subsidy for first-time buyers, £2.2 billion.
Mr Osborne said GDP per capita figures showed people were better off now than they were five years ago while separate data on living standards also showed an expected increase for this year on 2010.
Improvements to public finances have been boosted by lower inflation, meaning index-linked debt payments on Government bonds are expected to be £35 billion lower than they were a few months ago, the Chancellor revealed.
Inflation - at a record low of 0.3% and expected to fall further - has been lowered by tumbling world oil prices as well as the supermarket price war.
Treasury coffers are also boosted by £3 billion a year from lower unemployment meaning less paid out in benefits, plus £13 billion from a sell-off of assets from bailed out Northern Rock and Bradford & Bingley.
Mr Osborne also said at least a further £9 billion of shares in rescued Lloyds bank is to be sold in the coming year.
He said it would be "deeply irresponsible" to use this as a windfall, with the resources from the bank sales, lower interest payments and lower welfare bills instead to be used to pay down the national debt.
The Chancellor said: "We put economic security first."
Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "Chancellor George Osborne has stuck to his word and delivered a fully-funded budget despite the fact that an election is just around the corner.
"Clearly he decided that it would play better with the electorate to emphasise his fiscal prudence rather than resort to some blatant pre-election bribery.
"The Chancellor has scaled back the spending cuts a bit, ending them a year early. But that still leaves four years of deep spending cuts to get through first.
"Indeed, the big picture is that the fiscal squeeze is still only halfway through, meaning that interest rates will need to remain very low throughout most of the next parliament."
John Longworth, director general of the British Chambers of Commerce, said: "It appears that the Chancellor has pulled off a difficult balancing act, maintaining fiscal discipline while ensuring that necessary deficit reduction doesn't undermine the UK's growth prospects.
"Yet the Chancellor avoided the temptation to use new-found windfalls for gimmicks. His focus on fiscal responsibility will play well with business audiences."
The Institute of Directors said: "This was a solid and responsible budget.
"Few Chancellors would be able to resist the temptation to binge on a £22bn windfall from the sale of bank shares this close to an election. By using it to pay down our national debt George Osborne has shown commendable discipline."
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