1. The updated version of this graph
Let’s start with the basics. The above graph shows the Office for Budget Responsibility’s most recent forecasts for public sector net borrowing – aka, the deficit. This is what George Osborne is hoping to reduce to naught, or lower, by 2019-20, as per the requirements of his fiscal mandate.
Will he do it? The OBR currently expects so; they forecast a surplus of £10.1 billion in the target year. But they’re not entirely certain about it. The fanned-out part of the chart shows, in their words, “the probability of different outcomes”. There’s a 20 per cent chance that public sector net borrowing will be within the darkest blue band at any given time. A 40 per cent chance that it will fall within the outer bounds of two second-darkest bands. A 60 per cent chance that… well, you get the point.
The upshot of this is that, again in the OBR’s words, “there is a roughly 55 per cent chance that PSNB will be in balance or surplus in 2019-20”. Huzzah! Or not, if you’re anything like me. A 55 per cent chance of Osborne hitting his target means that there’s a 45 per cent chance of him missing it. Those are odds that the Chancellor shouldn’t be satisfied with.
These percentages could be wrong as well. After all, fan charts are constructed around something – the central forecast – that they also partially tear down. But at least they highlight the uncertainty of fiscal forecasts, which is an important service. Hence why I’ve championed fan charts for some time.
As for next Wednesday’s Budget, it might be worth paying closer heed to these odds than usual. With all the economic worries in town, from China to the price of oil, Osborne’s 55 per cent chance of success could start declining.
2. Whether the OBR mentions Brexit
The OBR “stress test” their forecasts in various ways. One is by totting up their past errors, which is how the fan charts are produced. Another is by fiddling around with some of the assumptions behind their central forecasts. And yet another is by “looking at alternative economic scenarios”.
So, how’s this for an alternative economic scenario? Britain votes Leave in June, and we depart the European Union. What would that mean for the OBR’s forecasts?
No doubt there are entire teams of Budget Responsibilitarians devoted to answering this question. What’s more doubtful is whether we will get to see any of their working next week. The problem, as usual, is the politics. If the OBR were to publish a pessimistic account of Brexit, they would be accused of being Osborne’s little helpers. This isn’t a good look for what’s meant to be an independent body.
But looks be damned: if the OBR has given thought to the EU Referendum, I’d like to know what they concluded.
3. Will the sofa give again?
“Unfortunately, £27 billion is not as much as it sounds.” No, it wasn’t Donald Trump who said that, but the head of the OBR, Robert Chote. He was referring to the £27 billion that, courtesy of higher-than-expected tax receipts and lower-than-expected interest payments, was credited to the public finances at the time of the last Autumn Statement. His point was that even fat sums can be spread thin across the full five years of a Parliament, particularly when you consider all the other revisions – bad, as well as good – that can happen in that time. As Chote went on to observe, “what the sofa gives, the sofa can easily take away”.
But the fact remains that £27 billion is better than nothing, particularly given the margins that Osborne is operating within. He’d welcome another similar windfall. He might even get one. The Times recently reported (£) that the OBR could find another £20 billion ahead of next week, “because of tumbling government borrowing costs and lower-than-expected inflation”.
4. And would Osborne choose to spend or to mend?
That £27 billion could have been used to reduce the deficit faster. But it wasn’t, not entirely. According to the OBR, Osborne made decisions in the last Autumn Statement that added “a cumulative £18.7 billion to public sector net borrowing”. Only £8.3 billion, or about 31 per cent, of the surprise sum remained.
Would Osborne do likewise if he received another windfall? It’s hard to say. The part of him that’s a political strategist probably thinks that, against Jeremy Corbyn’s Labour, there’s little to be lost from taking a more relaxed approach to deficit reduction – it’s not as though the Conservatives are ever going to be regarded as the fiscally profligate ones. But the part of him that’s Chancellor of Exchequer does sound concerned about the state of things. He has warned that there may need to be further spending cuts, he has declined to rule out extra tax hikes. Perhaps he now regrets not focusing upon the deficit in the Autumn Statement.
5. Whether the Chancellor moves back within the welfare cap
For this Parliament, Osborne set out three fiscal targets. The first, which I’ve already mentioned, is to bring the public finances into surplus by 2019-20. The second requires our national debt to fall as a percentage of GDP in each year until 2019-20. And the third is his cap on certain types of benefit spending. By the time of last November’s Autumn Statement, one of these was already in peril.
I explained why Osborne is expected to breach his welfare cap one of my To The Point posts, from which the above chart is taken. It’s basically a combination of forecasting revisions and extra spending. The OBR had previously underestimated the number of claimants for disability benefits, whilst the Chancellor decided to cancel his cuts to tax credits. All of the columns were pushed upwards.
But, technically, the cap can persist. The Chancellor could cut welfare spending to bring those columns down. Or, even if he breaches it now, he could resolve to return to it in future.
Or will it just be quietly done away with?
6. Will the merger finally happen?
Policies can have long histories. It was in Osborne’s second Budget of the last Parliament, in 2011, that he announced a consultation on merging National Insurance with Income Tax. Many Budgets then passed without any news, until we reached the first one of this Parliament, in which he revealed that he was going to set the Office of Tax Simplification on producing a full review. That review was finally published this week, although it didn’t get as much attention as it should have, amid all the din about Europe.
Will Osborne now act? It would be strange if he didn’t, given that he has clung on to the policy for so long. But, as Len Shackleton pointed out in a recent article for City AM, a full merger isn’t without political risk. For all the promise of an easier, clearer, fairer tax system, there are also some pitfalls, particularly when it comes to contributory benefits. How would these work when there’s no way of distinguishing between the National Insurance contributors and the National Insurance non-contributors? Would the former have to lose out?
But there are ways that Osborne could progress without introducing a full merger just yet. The Office of Tax Simplification makes that clear by suggesting a seven-stage process for bringing the two levies together, as well as the broad recommendation that he just “establish a legislative process to secure convergence”. This policy’s languid gestation period may not be over.
7. The consequences of cheap oil
The cost of a barrel of Brent Crude may not be as low as $30, as it was in January, but it’s still quite depressed – $40.72 at the close of yesterday’s trading. This means that petrol prices are pretty low too. The average price of a litre of unleaded has declined from just over £1.30 to around £1.01, or by 22 per cent, over the past two years. The average price of a litre of diesel has declined from £1.38 to £1.02, or by 26 per cent.
This puts Osborne’s efforts to contain fuel duty, during the last Parliament, in a new context. The Chancellor forewent £billions a year to shave the occasional penny off what we pay at the pumps. Yet oil price fluctuations have since shaved many pennies off, and much quicker than any Chancellor could ever manage. They’ve delivered savings we can actually notice.
“So why,” the Chancellor might think, “should I bother?” He’s already losing out on revenues from the UK’s oil and gas industry, which have decreased from £11 billion to just £130 million over the past four years. A hike to fuel duty could help plug several holes.
8. Will Osborne increase taxes to raise money…
If Osborne does decide to raise fuel duty, which is never a popular policy, it will be a measure of how concerned he is about missing his deficit target. If he starts raising other everyday taxes, you’ll know that he’s really concerned. It’s always difficult to predict these things in advance, but I’d keep an eye on alcohol duties. Even the Institute for Fiscal Studies is making an argument against their inconsistency: “Action to tackle the very low levels of duty charged on strong cider would also make sense: a litre of 7.5 per cent ABV beer is liable for duty of 138p, while a litre of 7.5 per cent ABV cider attracts duty of only 39p.”
9. …or cut taxes to raise money?
Get out your Laffer Curves, folks. Last week the Chancellor boasted that his cut to the top rate of Income Tax, from 50p to 45p, hadn’t actually reduced revenues – it had increased them by £8 billion. “This completely defies the predictions,” he said, “and shows that what we have are lower, competitive taxes that are paid by all.”
The timing of this observation, a week out from a Budget, is curious. Will Osborne set his Treasury officials on finding more taxes where a cut can actually result in a rise? Because if he doesn’t, he might have created some trouble for himself. There will be plenty of Tory backbenchers willing to remind him of the Laffernomics he was espousing only days earlier.
10. The response from the Opposition
No, not the de jure Opposition of Jeremy Corbyn and John McDonnell, which isn’t really anything. But the de facto Opposition of this Parliament, which comes from within Osborne’s own party. The Chancellor has already tried to stave off the worst by ditching his pension reforms, as Paul Goodman described earlier this week. Yet after David Cameron’s EU deal, and what’s regarded as his subsequent mishandling of the party, some backbenchers are eager for a dustup. As it was last year, with the row over tax credits, this year’s Budget could be a locus for discontent.