Read more: George Osborne's last chance
In a remarkable turnaround from the optimism of his Autumn Statement last November, the Chancellor hasn’t been shy in warning us about what he’s going to say in Wednesday’s Budget. The word has gone out that difficult decisions have to be made. The main reasons, says the Government, are the latest estimates by the Office for Budget Responsibility (OBR) concerning the size of the UK economy and its growth, and the increasingly uncertain global economic environment. Whatever sweeteners the Chancellor may announce on Wednesday, he is planning for a more contractionary economic stance as far as 2020 in the hope that he can reverse course before the election. Always provided, of course, the EU referendum result keeps him in situ.
The OBR announced not that long after the Autumn Statement that nominal GDP, or the monetary value of all the goods and services produced, had grown more slowly than it previously thought. As a result, for example, the UK’s nominal GDP in 2015 was put at £1,864bn, compared with the £1,882bn previously estimated. Extrapolated to 2020, especially with lower inflation, the OBR’s new data show a growing but persistently smaller economy than expected. From the Treasury’s point of view, this means tax revenues are lower than predicted, and likely to remain that way, so that the £10bn budget surplus planned for 2020 will, on unchanged policies and economic assumptions, evaporate.
Because George Osborne has nailed his colours to this particular mast, he will reveal how he aims to remain on course to achieve this surplus. We can argue whether he has hoisted himself on his own petard by setting the £10bn target, but there are now few imaginable circumstances under which he could back away from it and maintain his credibility. Especially given he faces mounting opposition from within his own party to his own job performance and to his prominent position in the EU Remain camp.
He has been trying to soften us up since the start of the year. In January, he warned about a "cocktail of economic risks" at a time of financial market turbulence around the world, focused on the US and Euro Area economies, China’s economy and currency, emerging market growth, and falling oil prices. These risks, though, were all present in November last year, and before. What was new was the mess in the markets, which has since subsided and, to varying degrees, reversed.
No one imagines the global economy is in great shape, but the US isn’t going into an imminent recession, China has stabilised for now thanks to a continuing, extraordinary credit surge, Euro Area economic data are coming in a bit better than expected and the ECB has just opened another monetary sluice gate, and oil prices have picked up a bit. For now, then, these risks are not the clear and present danger previously imagined. And to the extent they may be again in the medium-term, the incumbent Chancellor will have to adapt if and when the time comes.
At the recent G20 meeting in Shanghai, the Chancellor told the BBC that further cuts in public spending would have to be considered, shortly before the issuance of a group communique calling upon all members to take whatever fiscal and monetary actions might be necessary to help sustain fragile economic growth—that is, more spending. He was by no means alone in speaking with forked tongue, it has to be said.
Then, last weekend, he said in an interview that "the world is a more uncertain place than at any time since the financial crisis," as the Treasury let it be known that some £4bn of additional fiscal restraint annually would be needed by 2020 if the surplus target was to be realised. The devil will be in the details as Osborne outlines who will receive benefits in terms of tax and spending, and who’s going to pay.
A pot pourri of stories is already out there concerning insurance premium and other lower profile forms of taxation, a further tax clampdown on banks and multinational companies, disability benefit cuts, ending the freeze on fuel duty under cover of the slump in retail petrol prices, as well as changes to tax-free allowances on income tax. There will doubtless be more on show on Wednesday.
Surely, though, the greatest uncertainty in the world from a British point of view at the moment is the EU referendum, which the Government itself initiated. But it is too late to argue this point. There is no question whatsoever that a vote to remain sustains the status quo of the UK economy, the pound and UK financial markets. Whatever else happens to them, our continued EU membership, per se, will be neutral relative to where we are today.
A vote to leave, on the other hand, throws up huge uncertainties, the outcomes of which are impossible to predict. However politicians, lacking knowledge or evidence, attempt to assure us of order and opportunities, economists ought to know better that uncertainty will, at the very least, push up risk premiums. Higher risk premiums will add to the cost of servicing debt, aggravate the financing of the UK’s large external deficit, and weaken local and inward investment with negative consequences for research and development, employment, and productivity. It is more scary than scaremongering, but it seems highly likely that a vote to leave would have economic consequences that would wreck the fiscal strategy the government will cobble together on Wednesday.
Now read: What John McDonnell should say
In a remarkable turnaround from the optimism of his Autumn Statement last November, the Chancellor hasn’t been shy in warning us about what he’s going to say in Wednesday’s Budget. The word has gone out that difficult decisions have to be made. The main reasons, says the Government, are the latest estimates by the Office for Budget Responsibility (OBR) concerning the size of the UK economy and its growth, and the increasingly uncertain global economic environment. Whatever sweeteners the Chancellor may announce on Wednesday, he is planning for a more contractionary economic stance as far as 2020 in the hope that he can reverse course before the election. Always provided, of course, the EU referendum result keeps him in situ.
The OBR announced not that long after the Autumn Statement that nominal GDP, or the monetary value of all the goods and services produced, had grown more slowly than it previously thought. As a result, for example, the UK’s nominal GDP in 2015 was put at £1,864bn, compared with the £1,882bn previously estimated. Extrapolated to 2020, especially with lower inflation, the OBR’s new data show a growing but persistently smaller economy than expected. From the Treasury’s point of view, this means tax revenues are lower than predicted, and likely to remain that way, so that the £10bn budget surplus planned for 2020 will, on unchanged policies and economic assumptions, evaporate.
Because George Osborne has nailed his colours to this particular mast, he will reveal how he aims to remain on course to achieve this surplus. We can argue whether he has hoisted himself on his own petard by setting the £10bn target, but there are now few imaginable circumstances under which he could back away from it and maintain his credibility. Especially given he faces mounting opposition from within his own party to his own job performance and to his prominent position in the EU Remain camp.
He has been trying to soften us up since the start of the year. In January, he warned about a "cocktail of economic risks" at a time of financial market turbulence around the world, focused on the US and Euro Area economies, China’s economy and currency, emerging market growth, and falling oil prices. These risks, though, were all present in November last year, and before. What was new was the mess in the markets, which has since subsided and, to varying degrees, reversed.
No one imagines the global economy is in great shape, but the US isn’t going into an imminent recession, China has stabilised for now thanks to a continuing, extraordinary credit surge, Euro Area economic data are coming in a bit better than expected and the ECB has just opened another monetary sluice gate, and oil prices have picked up a bit. For now, then, these risks are not the clear and present danger previously imagined. And to the extent they may be again in the medium-term, the incumbent Chancellor will have to adapt if and when the time comes.
At the recent G20 meeting in Shanghai, the Chancellor told the BBC that further cuts in public spending would have to be considered, shortly before the issuance of a group communique calling upon all members to take whatever fiscal and monetary actions might be necessary to help sustain fragile economic growth—that is, more spending. He was by no means alone in speaking with forked tongue, it has to be said.
Then, last weekend, he said in an interview that "the world is a more uncertain place than at any time since the financial crisis," as the Treasury let it be known that some £4bn of additional fiscal restraint annually would be needed by 2020 if the surplus target was to be realised. The devil will be in the details as Osborne outlines who will receive benefits in terms of tax and spending, and who’s going to pay.
A pot pourri of stories is already out there concerning insurance premium and other lower profile forms of taxation, a further tax clampdown on banks and multinational companies, disability benefit cuts, ending the freeze on fuel duty under cover of the slump in retail petrol prices, as well as changes to tax-free allowances on income tax. There will doubtless be more on show on Wednesday.
Surely, though, the greatest uncertainty in the world from a British point of view at the moment is the EU referendum, which the Government itself initiated. But it is too late to argue this point. There is no question whatsoever that a vote to remain sustains the status quo of the UK economy, the pound and UK financial markets. Whatever else happens to them, our continued EU membership, per se, will be neutral relative to where we are today.
A vote to leave, on the other hand, throws up huge uncertainties, the outcomes of which are impossible to predict. However politicians, lacking knowledge or evidence, attempt to assure us of order and opportunities, economists ought to know better that uncertainty will, at the very least, push up risk premiums. Higher risk premiums will add to the cost of servicing debt, aggravate the financing of the UK’s large external deficit, and weaken local and inward investment with negative consequences for research and development, employment, and productivity. It is more scary than scaremongering, but it seems highly likely that a vote to leave would have economic consequences that would wreck the fiscal strategy the government will cobble together on Wednesday.
Now read: What John McDonnell should say
