An 'optimal' Budget?

George Osborne George Osborne has not had much space to move

They say economics is all about "constrained optimisation" - you try to get the best outcome, subject to numerical constraints. It's the same for chancellors.

In the overall scheme of things, he didn't do much. But if ever there was a chancellor constrained by economic and political circumstances it is George Osborne. And they just got a bit worse.

Growth is down this year and next - with the fall in the forecast for 2013, from 1.2% to 0.6%, quite a lot bigger than most had predicted. The Office for Budget Responsibility (OBR) is now on the gloomier side of the spectrum of independent forecasters. Though, historically, it has not stayed that way for long.

Borrowing is up over the medium term, as everyone predicted - meaning the UK public net debt in 2015-16 will be £60bn higher than forecast in December.

The structural hole that the chancellor set himself to fill has also risen - the OBR thinks his target measure of the deficit in 2013-14 will be 2.8% of GDP, not 2.2%, as it thought in December - or 0.7%, as it forecast in June 2010.

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When he wrote that first Budget, Mr Osborne thought he would have eliminated that measure of the deficit entirely by 2014-15. Now it will take him until 2016-17, and the margin for even that success is just 0.1% of GDP.

Even that tiny margin for error is large compared to the amount that the government can claim the deficit has fallen in the past year. There are numerous measures of borrowing listed on page 160 of the OBR's Economic and Fiscal Outlook, depending on how many special factors you strip out of the total.

If you get rid of all of those one-offs - including a new one, related to transfers due to the Special Liquidity Scheme (SLS) for banks - then borrowing has risen very slightly between 2011-2 and 2012-13, from £121bn to £123.2bn.

However, though the OBR has bothered to provide us with this stripped down figure on table 4.36 of its report, it seems comfortable to use the borrowing numbers highlighted, unsurprisingly, by the Treasury. These include the SLS transfers (but not other special factors) and show borrowing falling by £0.1bn, from £121bn to £120.9bn.

For reference, that £0.1bn difference compares with an average forecasting error, for borrowing numbers one year out, of £12-15bn.

Graph showing borrowing
'Wide margin'

The big picture, underscored by the OBR itself, is that the deficit will be more or less the same in 2011-12, 2012-13 and 2013-14: around £120bn.

Of course, there's an enormous amount of politics in the details. But the economic story, as the OBR director, Robert Chote said himself, is that the effort to cut the overall deficit has stalled. It has been put on hold for three years by the weak economy.

As you know, city experts were predicting borrowing would rise a lot more than this. How did the chancellor avoid this fate?

The OBR gives us a large part of the answer in page 128 of its report, which explains how the expected under-spend by government departments in this fiscal year has risen, in just a few months, from an already high £7.5bn to an astonishing £10.9bn.

As the OBR itself says, it is "very rare for the government to under-spend the departmental plans it has set out less than a year ago by such a wide margin".

Paragraph 4.118 explains the elaborate efforts involved in coming up with such a large number, which include delaying payments to bodies such as the World Bank, by a matter of weeks, so as to get them into the 2013-14 tax year instead of 2012-13.

It's not the first time that a Treasury had used these tactics. But you have to wonder whether Mr Osborne will continue to talk quite so much about the fiscal fiddles that went on in the Gordon Brown era.

The OBR itself "sees some risk" that some of the payments now tabled for 2013-14 will actually be made in 2012-13, as previously planned.

If that happened, we would find, next time the chancellor stands up, that spending in 2012-13 has gone up again, and spending in 2013-14 has gone down.

Call me crazy, but I don't think that is a risk that will unduly concern Mr Osborne. It could even make it easier for him to say borrowing has fallen next year as well. Imagine that.

So much for the fiddly details. The big picture is that the chancellor has done a little more than expected, given the great economic and political constraints that he is labouring under.

But we can say that Whitehall has bent itself to the chancellor's will, even if the economy has not.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this

    Comment number 33.

    It's the Orwellian new-speak that gets me. Take housing. Brownfield sites and redundant shops proliferate and rot empty rather than becoming townhouses because of fictional rating valuations and bank balance sheets. Mr Osborne's housing "market" will be about as destructive of our towns as the USA's "solution" to school segregation was, namely busing. Wake up! Internet shopping is here to stay!

  • rate this

    Comment number 32.

    Do we know anymore about government departments slashing spending until the end of the fiscal year in order to under-spend on 12/13?

    Channel 4 News has just stated that it is practically a trick, with contributions to the UN, for an example, being withheld until I'd imagine April 1st?

  • rate this

    Comment number 31.

    Political restraint comes from not winning the election,no majority.Also I really believe these people(government) haven't got a clue what to do so overall they do nothing.The true economic restraint is the banks refusing to circulate the money,we the tax payer have saved them with then filled their vaults with.Cutting fuel and income tax(for the majority) would stimulate the economy,why not do it

  • rate this

    Comment number 30.

    Now now, everyone. Lets not have a go at this Chancellor. He's trying his best, after all. A week folding towels at Selfridges, a month as an NHS data entry clerk and several years working behind the scenes at Conservative Central Office are just what a chap needs to transform one of the worlds leading economies into one of the worlds biggest failures. He's certainly giving that his best shot...

  • rate this

    Comment number 29.

    Have your say(19) I agree- George is an economics mini brain, he has no economic sense and no appropriate education. Why is it that politicians can be the only class where not having the right qualifications does not matter.
    He is out of his depth, and we will see if the country agrees with me in 2 years time. People of Tatton, vote for anyone but George

  • Comment number 28.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 27.

    £130bn of loans so people can get on the mortgage market - why do we continue to fund this bubble. The sanity of high deposits is that when rates go up and house prices crash at least there is enough equity left in the house to remortgage. Cost of mortgage may go up but there is less chance of losing the house. So now you might also have a debt to govt. as well. Brilliant?

  • rate this

    Comment number 26.

    Still no real curb on benefits and public sector spending, without these over fed millstones dragging the economy down there might have been hope of a recovery. As it is until the government does what it said it would do and stops pussy footing around these touchy subjects , there will be no recovery,and Labour will return to destroy what little hope there was.

  • rate this

    Comment number 25.

    Are Stephanie F's comment unnecessarily biased against Coalition policies?
    Is she the tail-end of last century's BBC trendy-lefties?
    Look. If Osborne had not tried to keep to austerity measures, to climb slowly out of the deficit left by Labour the money markets would hammer him (us) with tens of billions in extra interest a year.
    SF, go on, use your economic skills to estimate that figure.

  • rate this

    Comment number 24.

    Constrained not half. This was all baked into the mix in 2008 and there is naff all anyone can do about it until the debt is worked off

  • rate this

    Comment number 23.

    Constrained by politics and economics....ideally we would have someone with courage to address the failing economy; find some constructive and equitable proposals.
    Whitehall savings of £11bn up from £8bn in a few months ?! Sounds like slack budgets (and the shunt into following years).
    Why oh why do we have to be governed by silly boys and girls.

  • rate this

    Comment number 22.

    @20 But can you imagine the squeals from Labour and various HYS comments if he'd done what REALLY needed doing?

    @18 Some people are capable of forming their own viewpoint. I have. On you.

  • rate this

    Comment number 21.

    5 years and no sign of the "green shoots" of recovery.

    Stephanie, I don't know if your position lets you speculate on this . . . what happens if there is no recovery in the UK or in Europe? Presumably the world doesn't owe us a living - capital can go wherever it thinks is most profitable.

    What if what we have now is the new normal?

    What will Britain and Europe look like in . . . 20 years?

  • rate this

    Comment number 20.

    I think one has to pinch oneself to think that annual borrowing and the national debt are still rising in the third and fourth years of a new Government.

  • rate this

    Comment number 19.

    We are in the worst economic crisis since the 1930s so I feel entitled to ask . . . what exactly are the qualifications and experience that Osborne has to offer?

    (1) Member of the Bullingdon Club
    (2) Second-class history degree
    (3) One week folding towels in Selfridges
    (4) Tory Central Office
    (5) MP
    (6) Shadow Chancellor
    (7) Chancellor


  • Comment number 18.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 17.

    Optimal for the old and wealthy.

    *The* biggest problem this country faces is one of intergenerational inequality. The take-home message from this budget is Osborne's mortgaging (literally) of the futures of the young to placate the home-owning classes (quickly becoming a home-owning age group).

    Homes are overpriced. Re-inflating the bubble is either utter folly, or a new stab at feudalism.

  • rate this

    Comment number 16.


    On tonight's 6 o'clock news you talked about '...the cards the chancellor has been dealt...' this was true in 2010 but absolutely not today - now its how he plays his hand - and in this he has failed miserably.

  • rate this

    Comment number 15.

    We need to remember these are the "economists" Flanders and Sw sorry Peston that utterly failed to see flaws in the Cyprus bailout.Amazes me!

  • rate this

    Comment number 14.

    Let's face it......Osborne has as much idea of the future as I do....What will happen after the next election will be Labour will get in ( not as though they have any better ideas) and they will be saying....'Look at what the Tories have left us to clear up'......So, it will start again !!


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