As we prepare for George Osborne’s third fiscal announcement since the 2015 general election, Julian McCrae highlights some of the things to watch in order to understand how much pressure the Chancellor is really under.
Major fiscal announcements roll around at a rate of knots. This will be the Chancellor’s third since the May 2015 election. Both the previous ones have seemed like triumphs on the day, but a political miscalculation on tax credit cuts in July, followed by a November Spending Review that needs to be revisited before it starts (the cuts only begin this April), leaves the Chancellor trying to avoid a hat trick of failures. As usual, the Budget is well trailed. So what should you look for tomorrow to get behind the well-rehearsed spin?
Where will the spending cuts fall?
Ignore the size and timing of the trailed ’50p in every £100′ spending cuts. Watch instead where they fall to see how much political capital the Chancellor has in the bank. No matter how confident he feels, it’s unlikely he will touch the traditional ‘protected’ areas of health and schools. But will he feel he has the political capital to look for more out of the police? With a great flourish, he left this area pretty much unscathed in the Spending Review. With much less flourish, he also failed to get any in-year cuts from the Home Office when he launched early spending raid last June. Are policing cuts now off-limits to the Chancellor?
How will foreign aid and defence fare?
Both are linked to GDP, with spending supposed to be 0.7% of GDP for aid, and 2% of GDP for defence. Given we know GDP will be lower than expected, the Chancellor could reduce both these budgets. Indeed, in the last Parliament lower GDP invariably meant lower aid spending. So aid is almost certain to be cut tomorrow, but the real test of the Chancellor’s consistency and political position is whether he can apply the same logic to the defence budget.
How much pressure is there on departmental budgets?
We know that certain departments are already struggling to meet their 2015/16 spending plans. The NHS is all but certain to overspend, while the Ministry of Justice (MoJ) will probably manage to cut its budget, but may struggle to get achieve the planned 12% reduction. For an insight into how HM Treasury thinks departments are faring, go to the departmental spending table of the Budget document (usually Table 2.4). The Treasury does not publish the old plans, so just have in mind that the Department of Health’s day-to-day spending was planned to be £111.9bn and MoJ’s £6.3bn. If the numbers are higher than this, then the pressures are already telling.
How adventurous will the Chancellor be on tax?
The Chancellor has boxed himself in on tax, with a manifesto commitment not to raise income tax, national insurance or VAT, no matter what happens to the economy. This leaves him hunting for other measures. There is a lot of speculation on fuel duties and insurance premium tax, but also watch for increases in ‘charges’ and ‘levies’ acting as hidden taxes. If the Chancellor wants to take a more principled approach, he could announce a new way to review the effectiveness of tax expenditures.
How are the Chancellor’s short term wheezes going?
In the long run, only bringing tax and spending into balance can sort the UK’s public finances. In the short run, there are many things that the Chancellor can do to make his numbers look better. One of his favourites is asset sales, building expected receipts into the forecasts. Of course, it is the actual receipts that matter, and in the past the expectations have proved over-optimistic. With a weaker economic outlook, watch for whether the Office for Budget Responsibility reduces the amount the Chancellor can expect from his various asset wheezes.
Of course, it’s possible that the Chancellor will decide his reputation for being ‘tricksy’ with presentation is becoming a political liability, and the Budget speech tomorrow will tell us all we need to know about what’s happening with the public purse. But don’t bet on it. If we are to learn anything from the fiscal announcements of late, it’s that there is wisdom in waiting a month or two before deciding whether the 2016 Budget is a triumph or a miscalculation.
Note: this article was originally published on the Institute for Government blog, and is reposted here with thanks.
Julian McCrae is Deputy Director of The Institute for Government.