Shooting Foxes and Chasing Rabbits

Shooting Foxes and Chasing Rabbits

Summary

With the General Election fast approaching it was little surprise that this most political of Chancellors used the Budget not only to take pot shots at his rivals, but also to roll out a number of cost-effective carrots to be dangled in front of an electorate still reeling from a Parliament defined by austerity. Reducing duty on beer, cider and spirits, and introducing favourable terms for savers are but two examples of the Chancellor’s populist approach. However, while Osborne’s plans appear watertight from a distance, under closer scrutiny a number of vulnerabilities quickly manifest themselves.

Politicised Cuts and Scaled Back Surpluses

Perhaps the most striking feature of the Budget was the announcement that the government’s austerity drive would come to an end in 2018-19, rather than 2019-20 as initially planned. While the Chancellor had previously announced the goal of a budgetary surplus of £23 billion by the end of the next Parliament, this has now been scaled back to £7 billion. There seems to be some mischief in this decision. Ending the cuts early will allow the government to pump an extra £20.1 billion into the public sector in 2019, taking state spending level to a similar level (as a share of GDP) to 2001, and not the 1930s, as maintained by Labour.   It was, of course, not mentioned that between 2015 and 2019 the Chancellor plans to impose sweeping reductions in government expenditure. Indeed, the Office for Budget Responsibility predict that in 2016-17 and 2017-18, real cuts in public services will need to be more than double the depth seen in the tightest years of this Parliament to meet the Chancellor’s goals.   This would mean a historically unprecedented squeeze on departmental budgets and with education, health and international development ring-fenced, questions must be asked as to where, exactly, the Chancellor intends to make savings. Indeed, according to the OBR’s own statistics, day-to-day government spending will be forced down to pre-war levels. This is clear from the graph below, which highlights what Robert Chote, chair of the OBR, called Osborne’s “rollercoaster” approach to public expenditure.

Graph

Ignoring the Productivity Problem

Central to the Chancellor’s address were improved growth figures which suggest that the economy will expand by 2.5 percent in 2015, rather than the 2.4 percent previously predicted. However, this change is largely the result of sluggish oil prices and masks the fact that productivity (GDP per hour) fell by 0.3 percent. Indeed, the UK is now 17 percent less productive than the G7 average.   The productivity problem was unequivocally ignored by the Chancellor, with no notable incentives for manufacturers or developers. It is interesting that a ‘Help-to-Buy ISA’ for first-time-buyers was unveiled, worth up to £2.2 billion, yet no steps were taken to increase housing supply. In this case a subsidy or package of tax relief for firms providing much needed mid-level properties would seem to have been a more prudent use of capital. Similarly, although capital designed to expand and improve the internet-o- things was launched, the miserly sums involved (£40 million) suggest that it was included to shoe horn a joke about Ed Miliband’s kitchen arrangements into the address, rather than to support technical innovation.   Low productivity has contributed to exports falling by around 9 percent since 2010 and falling poor tax receipts. This is a deep structural problem and one that Osborne, and many other policymakers, have brushed over entirely.

A Recovery Built on Migration?

The Chancellor’s sunny economic forecast failed to acknowledge the impact of higher than expected net migration, which reached 298,000 last year. Indeed, the OBR calculate that net migration will add 0.6 percent to the potential output of the British economy and increase net tax receipts. This is because most migrants are of working age and tend not to travel with dependents.   As the OBR suggest, their previous growth forecasts were “underpinned by the assumption in the Office for National Statistics’ low migration population projections that net migration will move towards 105,000 a year by mid-2019…and it no longer seems central to assume it will decline so steeply.” Indeed, the OBR now “assume that net migration flows will tend towards 165,000 in the long term.” This will, in turn, help to “raise potential output growth by 0.5 percent” over the course of the next Parliament.   Indeed, to make the Chancellor’s pledge that the UK economy will overtake Germany’s relies not on productivity growth which has gone backwards but on immigration.   Such statistics fly in the face of opposition, particularly strong amongst Conservative backbenchers, to the free movement of labour from within the European Union and indicate the danger of pushing towards arbitrary caps on immigration. This point should not be ignored. Immigration is too often treated as a political football, with debate informed by little more than prejudice. The Chancellor seems to understand this, yet he has done little to defend the role played by migrants in supporting growth and enabling Britain to become, what he calls, the “comeback country.” In the months and years to come the disparity between perception and reality surrounding immigration could well become a point of friction within the Conservative Party and the country, more generally.

What Does this Mean, and Does it Really Matter?

In a YouGov poll commissioned by The Sun, published on Thursday the Tories had taken a 2 point lead over Labour, by 35 to 33 percent. This is perhaps of no surprise, Budget’s tend to see a slight bounce for incumbents, assuming of course it isn’t immediately poorly received. However, with just forty-eight days to go this bounce, however, slight takes on a new importance, not least because it fits into a wider pattern of the Conservatives gaining momentum.   In recent months Labour have become fixed on the Tories taking the country “back to the 1930s” and rhetoric built around Conservative spending cuts that could well undermine the foundations of the welfare state. In becoming wedded to such messaging Labour have forgotten the Chancellor’s arch-political nature, and he has exploited the situation ruthlessly. By offering a number of low-cost white rabbits – the Help to Buy ISA, for example – while simultaneously tackling Labour’s main line of attack, he has prepped his party for the coming election. The statistics revealing the impact this approach will have on the country are freely available, but it would take a bold opposition leader to pursue such a technical endeavour as presenting them effectively.   While this Budget may not be enough to keep David Cameron in Number 10 it certainly stands as a useful example of political manoeuvring over economic safeguarding, the benefits of which are for the electorate to assess.

Jack Taylor

Jack Taylor

Consultant at Keene Communications
Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.
Jack Taylor

About the Author

Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.