The Office for Budget Responsibility (OBR) expects the cyclically-adjusted primary deficit - a measure of the fiscal stance - to fall from 2.6 per cent of GDP last fiscal year to 1.7 per cent this year. That's a tightening of 0.9 per cent of GDP, whereas the March Budget foresaw a tightening of only 0.5 per cent of GDP. Much of this tightening will take the form of public spending cuts and a higher insurance premium tax.
However, the pace of tightening will be eased later. Whereas the March Budget foresaw 3.5 percentage points of tightening between 2015-16 and 2017-18, the summer Budget foresees only 2.6 percentage points. Because of this, the OBR now expects public sector net borrowing to be £11.5bn higher in 2017-18, at £24.3bn, than it anticipated in March.
One reason for the slower rate of tightening is that the chancellor has retreated a little from cutting departmental public spending. The March Budget foresaw this being cut by 9 per cent in nominal terms between 2014-15 and 2018-19, but he now plans cuts of just 0.4 per cent.
Instead, a bigger burden of austerity will fall upon welfare. The chancellor expects this to rise just 2.4 per cent in nominal terms between 2014-15 and 2018-19 - implying a cut of 2.4 per cent after inflation - whereas the March Budget foresaw a 6.9 per cent nominal rise. This is a cut of £9.9bn by 2018-19. The cuts will be achieved in large part by lower tax credits. Mr Osborne hopes that the impact of these upon lower earners will be offset by higher wages as a result of increases in the National Minimum Wage, which he has renamed the National Living Wage.
These plans are, however, predicated upon a benign macroeconomic environment; the OBR foresees real GDP rising by 12.5 per cent between 2014 and 2019, which would create an extra 1.2m jobs - the latter despite the fact that Mr Osborne plans to increase the minimum wage by almost 40 per cent by 2020, from £6.50 an hour to £9. However, the OBR says there is "considerable uncertainty around any economic forecast" and estimates that there is around a one-in-four chance of a recession in 2017. If that happens, Mr Osborne's current plans would become irrelevant.
