A Holding Budget? Osborne has to hope his numbers survive particularly unpredictable times
Politics Insight
The Budget which George Osborne delivered today comes against a particularly strange and unpredictable set of political circumstances and economic conditions. This largely explains the slightly schizophrenic character of the package that he presented. The Chancellor’s own political share price has taken a hammering of late and hence his chances of succeeding David Cameron in Number 10 when the moment comes have also been downgraded.
It is not, in fairness, very clear precisely why such a dramatic shift in elite sentiment towards him has materialised. It remains the case that Mr Osborne was the architect of his party’s unexpected majority victory less than a year ago and that perceptions of economic competence were central to that outcome. There is much that can be said against the Budget that he then announced last July – not least the Apprenticeship Levy and the unexpected increases in the national minimum wage – but the measure which caused the most controversy then, cutting tax credits for the working poor, was swiftly and totally abandoned. There are enhanced concerns about the condition of the economy but almost all of these are due to international factors that are manifestly beyond the control of Her Majesty’s Treasury, and some of them - fears of a hard-landing in China, a further oil price slump, stock market volatility - may prove to be overstated. It is, therefore, difficult to put a finger on precisely what has led to such a shift in the ‘consensus view’ about Mr Osborne from that he all but had the leadership in the bag, to the settled wisdom today that he has peaked too soon and that this might even be his last Budget as Chancellor.
Mr Osborne framed this Budget knowing that the Office of Budget Responsibility, which had come to his rescue somewhat through its forecasts of lower inflation and lower interest rates at the time of the Autumn Statement in November, was likely to be somewhat less helpful this time. As virtually every other economic forecaster had decided to hedge their bets by lowering their estimates for UK economic growth in 2016 and 2017, it would have been a major surprise if the OBR did not as well. The only question was whether these new forecasts would be an inconvenience or fundamentally undermine the whole basis of the Chancellor’s economy strategy. In the end, the sum of money that was cited, a ‘black hole’ of £18 billion, was at the relatively modest end of legitimate expectations.
The difficulty for the Government is that even a quite modest change is potentially challenging. The Chancellor has made a rod for his own back by determining, first, that the actual budget as a whole should be in surplus by 2019/2020 (rather than just current revenues matching or exceeding current spending, with capital expenditure discounted from the equation) and that in the future the same obligation for an actual balanced budget should be maintained in all circumstances other than when economic growth falls to below 1% per annum. While this may seem to be common sense economics to some, and when put to the public by pollsters is broadly endorsed as reasonable, it is actually immensely difficult to do in practice and is a sharp departure from what has been the norm in British fiscal policy for many decades now. Compared with the rules that this Chancellor has opted to impose on himself, all of Margaret Thatcher’s three Chancellors look like profligate Keynesians.
Yet it is precisely because Mr Osborne has made an actual Budget surplus (and ideally one of about £10 billion) by the end of this Parliament such a litmus test that it trumps almost every other aspect of his policy for him. Politicians are normally accused (and not without some evidence) of seeking the maximum possible flexibility for themselves in policy terms. This Chancellor has done the opposite. Yet the distinction between success and failure in these terms is incredibly small (and in terms of strict economic fundamentals almost meaningless). Tiny shifts in growth rates become seminal.
An attempt to keep on target while annoying the smallest number of the electorate
The Chancellor’s options have been further constrained by the politics of the EU referendum battle. In normal times, a Budget held at this early stage in the five-year Parliament would invariably be the optimal moment to take unpopular decisions which would be forgotten by the next general election. Mr Osborne, by contrast, cannot afford to do anything which would further deepen divisions among his own MPs or drive large sections of the electorate to treat the referendum as if it were some kind of massive by-election - a mid-term vote on the Government - not a decision about EU membership.
So for the Chancellor this was essentially a holding budget. He has no more idea than the rest of us as to whether the latest set of OBR estimates on growth will prove too optimistic, too pessimistic or about right. He did what was necessary in terms of tax increases and spending cuts to maintain his target of a surplus by 2019/2020 and sought to do so while making the smallest number of enemies. In that regard, for now at least, he will probably count his efforts today as having been successful.
Within the space that he had available, Mr Osborne again demonstrated three traits that have been apparent throughout his time as Chancellor. First, he used what discretion he had to assist causes that are close to his heart (and chime with selected Conservative constituencies), namely another cut in the UK corporation tax rate, some relief for small businesses and additional incentives for saving through another liberalisation of the ISA rules. Second, whenever he sees an argument that he is convinced the centre-left are ultimately destined to win (such as on the status of non-doms, the need to oblige companies to take on more apprentices or the living wage) his preference is to deny them that territory by moving on to it first. The sugar tax shift fits that pattern precisely. Third, the Chancellor likes to flag his prime ministerial qualities by associating himself publicly with policy initiatives which are not strictly speaking part of the Treasury’s conventional remit, in this case by adopting as his own what might be properly considered as the Education Secretary’s decision to accelerate the adoption of academy status in schools and curtail the role of local authorities here. That this notion will be strikingly popular with Conservative MPs and activists is hardly coincidence.
Will this have been the last Osborne Budget as Chancellor?
If the ‘Leave’ campaign triumphs on 23 June then this probably has indeed been the last moment when Mr Osborne holds aloft the fabled red box as Chancellor of the Exchequer. For all of his words today that he would not stand down as Prime Minister if the country did not back him over the EU, it is really hard to see how Mr Cameron could continue with any credibility and contend that he was obviously the man best placed to enter what would be lengthy and complicated negotiations as to exactly how and according to what provisions the UK organised its divorce from the EU. It is almost impossible to believe that were this to occur that Mr Osborne would be the logical replacement for his close friend as Prime Minister or that the new Prime Minister would keep him on as Chancellor.
In all other circumstances, however, unless he has determined of his own volition that he does not wish to continue as Chancellor, it is highly unlikely that Mr Osborne would be forced out of office. He is much more likely to continue in Number 11 until the question of the Conservative leadership is eventually decided. If it is he who takes the crown then he will move in next door and if not then he would be strongly favoured to become Foreign Secretary as a political consolation prize. What does seem improbable is that he will still be Chancellor by the time of the 2020 election. The importance of his pledge to balance the actual balance to the credibility of the Government in economic policy is such, though, that his ghost will inhabit (or haunt) the Treasury whoever the next Chancellor may be.
Tim Hames, Director General, BVCA
Research Insight
A Brief Guide to the Budget day documents
Every year, when the Chancellor sits down after delivering his Budget speech to the House, the full Budget document is released. Affectionately known as the ‘Red Book’ (even in the years the cover wasn't red), this document sets out the full detail of the Chancellor’s assessment of the UK economy and finances, as well as all of the policy measures announced on the day (or leaked beforehand).
This is the authoritative source for understanding the changes being implemented – where the speech sets out the Chancellor’s narrative and the measures that he wants to be headline news, the Red Book contains those less high-profile measures that, in the longer term, prove the foundations on which a Budget stands or falls. For those that remember the so-called Pasty Tax, or even much of the overall impact of the removal of the 10p rate of income tax, the Red Book is where the real impact of these policies was located.
Of particular interest within the Red Book is the scorecard and policy measures section (which, in today's publication, can be found in Chapter 2). This is the section that definitively sets down those measures that will be introduced (or have been since the Autumn Statement), and how much they will raise for or cost the Government. Watch out for those measures which will raise particularly significant sums for the Exchequer – even when these prove controversial, they can be tricky to reverse, as making the finances add up without them is a difficult proposition.
This section of the Budget is the one we at the BVCA pay most attention to, both today and over the coming days, as we work our way through exactly what the impact of today’s announcements on the private equity and venture capital industries – and on the companies that they invest in – will be.
Though the published scorecard will be slightly different from the one used internally in the Treasury (which will have a longer term outlook), this will have been the document that has controlled much of the department’s activity over recent months. As measures are confirmed or dropped, they will be confirmed in this document, and a clearer picture of exactly how much the Chancellor has to play with when considering which so-called giveaway measures to include.
One interesting point to be aware of is that the published scorecard covers only five years into the future. Particularly where dealing with measures that impact the timing, as opposed to the quantum, of the tax take (capital allowances, for example), measures that are fiscally neutral (or even cost money) over the longer term can be presented as revenue-raisers by the Government.
The Red Book is not the only document released on Budget day. Since its creation in 2010, the Office of Budget Responsibility (OBR) has set out its own independent assessment of the state of the economy and the public finances and their prospects going forward. The Economic and Fiscal Outlook is launched on the same day as the Budget or Autumn Statement, and its forecasts are the ones used to inform the measures announced in the Budget. Even very slight changes to the economic forecasts can have a huge impact on the shape of the public finances and the narrative that the Budget seeks to convey.
One relatively recent addition to the Budget process is a document that sets out the costings of individual policy measures and the assumptions behind these costings. This document, while technical, provides a host of information on the (assumed) impact of policies that are being proposed – and is particularly instructive in terms of providing an insight into what the expected behavioural impacts of given policies are likely to be.
The final document to flag, but by no means the least, is the draft Finance Bill. This isn’t usually published alongside the Budget (on the day, MPs will merely be voting to take the Finance Bill forward), but will come out a week later. This contains the draft legislation that will work its way through Parliamentary Committees in the lead-up to the summer and will eventually become law. It is here that the full detail of individual measures will really be highlighted, and where the nuances of the legislative drafting can have a significant impact. We will be following the passage of the Bill through Parliament closely over the coming months.
One final thought: for those who were unimpressed with the Leader of the Opposition’s response today, spare a thought for his circumstances. Jeremy Corbyn and his team will only have gotten access to the full Budget documents at the same time we did today, and his response had to cover off roughly three months’ work by an entire Government department – there is a reason that being Leader of the Opposition on Budget day is commonly known as the hardest (and loneliest) job in politics.
