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Government borrowing on the latest figures was up on last year, despite the economic recovery. By a rough count, the Chancellor has £36bn of further cuts to make after the next election. If tax revenues don’t start climbing soon, that figure will head north. In the meantime, his backbenchers want tax cuts and he is facing pressure from the NHS for relief funding. And, now he has announced a proposal for a new high-speed rail line. Does he know something we don’t?
It may be that Osborne's internal reckoners tell him that growth is stronger than the Office for Budget Responsibility (OBR) forecast at the Budget. Alongside the OBR's central forecast there were also some alternative scenarios. The most bullish was based on growth of 3.1 per cent this year and 3.3 per cent next year. Hitting those numbers would mean that public sector net borrowing starts falling quicker and that the debt to GDP ratio is in decline by next year, one year earlier than forecast. By the end of the next Parliament it may even be below 70 per cent. That’s a big change.
The Chancellor could be sitting on even better news. Mark Carney said at Mansion House on 12th June that the economy is expanding at an annualised rate of 4 per cent. If we look underneath the headline borrowing figures from last month (excluding the impact of things like the Asset Purchase Facility) then we see that tax revenues are up by a similar rate on last year. While income tax receipts are up by a much smaller amount, VAT, stamp duty and corporation tax are picking up the slack. The OBR said at Budget that there was a 20 per cent chance of hitting a current surplus in 2015-16. Those odds may have improved, which would give the Chancellor the flexibility to announce more spending while sticking to his target of achieving a surplus by 2018-19.
He might even be tempted to grab some extra flexibility. Lord Adair Turner recently suggested that the Bank of England could “seal off” the government debt it has bought by way of quantitative easing, or a portion of it, and turn it into non-interest bearing bonds. This would recognise the practical reality that perhaps it is never going to sell that debt back into the market. The government is forecast to pay almost £60bn in debt interest in 2015-16. The Bank owns about a third of the debt. So the saving on debt interest for the government from a further unconventional monetary strategy could be as high as £20bn, which combined with stronger than forecast growth will mean that austerity is over.
These are risky manoeuvres though, premised on the continuation of aggressive economic growth and perhaps just as likely to irritate the deficit hawks in the Chancellor’s party as to appease its electoral strategists. Labour will claim that Osborne is resorting to accounting tricks having failed in the central task of austerity. But he has a level of credibility with the electorate that they do not on these issues and we might all simply be too relieved to complain. The Chancellor is proposing to tunnel under the Pennines to create his new high-speed line; he may also be preparing to bury the hatchet of public spending cuts.
Government borrowing on the latest figures was up on last year, despite the economic recovery. By a rough count, the Chancellor has £36bn of further cuts to make after the next election. If tax revenues don’t start climbing soon, that figure will head north. In the meantime, his backbenchers want tax cuts and he is facing pressure from the NHS for relief funding. And, now he has announced a proposal for a new high-speed rail line. Does he know something we don’t?
It may be that Osborne's internal reckoners tell him that growth is stronger than the Office for Budget Responsibility (OBR) forecast at the Budget. Alongside the OBR's central forecast there were also some alternative scenarios. The most bullish was based on growth of 3.1 per cent this year and 3.3 per cent next year. Hitting those numbers would mean that public sector net borrowing starts falling quicker and that the debt to GDP ratio is in decline by next year, one year earlier than forecast. By the end of the next Parliament it may even be below 70 per cent. That’s a big change.
The Chancellor could be sitting on even better news. Mark Carney said at Mansion House on 12th June that the economy is expanding at an annualised rate of 4 per cent. If we look underneath the headline borrowing figures from last month (excluding the impact of things like the Asset Purchase Facility) then we see that tax revenues are up by a similar rate on last year. While income tax receipts are up by a much smaller amount, VAT, stamp duty and corporation tax are picking up the slack. The OBR said at Budget that there was a 20 per cent chance of hitting a current surplus in 2015-16. Those odds may have improved, which would give the Chancellor the flexibility to announce more spending while sticking to his target of achieving a surplus by 2018-19.
He might even be tempted to grab some extra flexibility. Lord Adair Turner recently suggested that the Bank of England could “seal off” the government debt it has bought by way of quantitative easing, or a portion of it, and turn it into non-interest bearing bonds. This would recognise the practical reality that perhaps it is never going to sell that debt back into the market. The government is forecast to pay almost £60bn in debt interest in 2015-16. The Bank owns about a third of the debt. So the saving on debt interest for the government from a further unconventional monetary strategy could be as high as £20bn, which combined with stronger than forecast growth will mean that austerity is over.
These are risky manoeuvres though, premised on the continuation of aggressive economic growth and perhaps just as likely to irritate the deficit hawks in the Chancellor’s party as to appease its electoral strategists. Labour will claim that Osborne is resorting to accounting tricks having failed in the central task of austerity. But he has a level of credibility with the electorate that they do not on these issues and we might all simply be too relieved to complain. The Chancellor is proposing to tunnel under the Pennines to create his new high-speed line; he may also be preparing to bury the hatchet of public spending cuts.
