In his Autumn Statement in December Mr Osborne forecast that total spending would fall to 35.2 per cent of GDP by 2019-20. But in this week’s Budget he revised this up to 36 per cent – which is only the lowest rate since 1999-2000.
This upward revision came after a big windfall. Because gilt yields have fallen since December, and the market expects them to stay low, the OBR forecast that spending on debt interest in 2019-20 will be £9bn less than it expected in December. The Chancellor intends to use this money to increase departmental spending. He now expects this to be 10.2 per cent higher in 2019-20 than he predicted as recently as December.
This means he’s planning significantly fewer cuts than in December. Then, he forecast that departmental spending would fall by 11.7 per cent between 2014-15 and 2019-20 in nominal terms - a drop of 20.1 per cent in real terms. Now, he forecasts a nominal cut of 2.6 per cent, implying a real cut of 11.8 per cent. These revisions have been welcomed by some economists who thought that the huge cuts planned in December were simply too big to be plausible. “The path of implied spending cuts is less draconian and therefore more realistic” said Investec’s Philip Shaw.
With spending plans revised up, but with Mr Osborne still planning on a surplus on public sector net borrowing by 2018-19 (of £5.2bn compared to a deficit this year of £90.2bn), he had little room for a pre-election giveaway. In fact, overall, the measures he announced on Wednesday will raise a net £745m for the Treasury next year. This is largely because the bank levy will raise another £685m. However, there were small giveaways for later years. A rise in the personal allowance will transfer £960m from the Treasury to taxpayers in 2016-17, and allowing savers to keep the first £1,000 of savings income free of tax will transfer another £960m.
With Mr Osborne now planning smaller cuts, the gap between Conservative and Labour spending plans is now smaller. And because - for a given inflation target - differences in fiscal policy imply differences in monetary policy, this should also mean less uncertainty about monetary policy too. In this sense, Mr Osborne has reduced the potential for big political uncertainty in the run-up to the election. Nevertheless, with the election now just seven weeks away, some economists believe markets will increasingly focus on this. “Political risk and uncertainty will become more of an issue” said ING’s James Knightley, who expects sterling to fall a little against the euro.