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 53.

    NI - down
    Corporation tax -down .
    Beer tax - down
    Fuel duty - rise cancelled
    home buyers - more support .
    Etc etc .
    So many positive things to talk about .

    Unless you write for the BBC .

  • rate this

    Comment number 52.

    Steph's comment "fiscal fiddling during the Gordon Brown years"

    That's ruined my fond memories of those years - surely the man of the manse was not capable of such a thing, especially when having Ed Balls on his team?

  • rate this

    Comment number 51.

    But why is he unable to cut the deficit when he is cutting every thing

    But bankers bonuses

    It makes no sense we are paying more and getting a lot less

  • rate this

    Comment number 50.

    The evidence where I live (a dormitory town 30 miles out of London) is that people who price their houses realistically sell them. The property market is moving again. I am opposed to this idea because it seems unnecessary. The rest of the budget, I would have done similar things myself.

  • rate this

    Comment number 49.

    21 Acton Bell
    "What will Britain and Europe look like in......20 years?"

    Ask Milliband and Ball - they will be in charge for most of that time.

  • rate this

    Comment number 48.

    None of this will change anything.

    Our economy is doomed..... doomed I tell you.

    Debts so large we shall never be able to repay them and no manufacturing. Our economy will decline for decades. Get ready for much worse to come.


  • rate this

    Comment number 47.

    The chancellor wants to encourage more people to take advantage of unsustainable property prices by underwriting the risk of a further market correction.

    In doing so, the government appears to be mimicking the worst excesses of high street banks in the run-up to 2008.

    It's difficult to understand why that makes any sense?

  • rate this

    Comment number 46.

    Without tough immigration controls, to protect British jobs, expanding the economy will not make any significant dent in the 2.5 million unemployed. 'Free trade' is for the benefit of 'supplying' countries and not importing nations such as ours. A Britian negotiating trade deals could re-build its manufactoring base and provide once again full employment. A winner in 2015 for Government?.

  • rate this

    Comment number 45.

    so is this 120 Bn on top of the 5bn a month we already give to banks to provide mortgages ?
    couple with the loans for business and other schemes just what the hell are banks actually doing now ?

    a 1p of a pint wow i am so grateful he is really helping the masses.

    Property values have to fall to match the lack of wages not be propped up baldrick.....

  • rate this

    Comment number 44.

    I'm against the so called "Help to Buy" scheme which doesn't help first time buyers at all.

    All it will do is cause house prices to rise, and First Time Buyers will be given a bigger mortgage to compensate.

    Instead Osborne should have given tax breaks to the construction industry and given relief to those in -ve equity. The last thing this country needs is a debt fuelled house price bubble.

  • rate this

    Comment number 43.

    The £5billion a year subsidy to millionaire landowners is still ring fenced. Land prices rose 10% from last year and all profits are tax free if you wait for more land. Who are these landowners who enjoy such exclusive benefits. If you have £12,000 in the bank you lose state handouts. if you have 12,000 acres you get them. Housebuilders sit on their rising land banks. In it together?

  • rate this

    Comment number 42.

    Being stoney broke myself, I'm trying to cash in both my TV License and my Premium Bonds

    The form I send off to the NS and I some time ago has still not been actioned. The part of the TV Licensing website that provides refunds on cancelled licenses is currently not working.

    If either or borth of these things are tied in with the fiscal fiddling detailed above Osborne could be in BIG trouble

  • rate this

    Comment number 41.

    "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."

    No amount of shifting payment dates back and forth to generate a more pleasing short-term trend can disguise the less pleasing long-term trend.

  • rate this

    Comment number 40.

    I find Osbourne is over political and should just get on with the facts he wants to present. It actually makes him hard to listen to and does nothing for my confidence in the economic management.
    Are we really saying there was NOTHING more he could do to try and snd encourage economic growth?

  • Comment number 39.

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

  • rate this

    Comment number 38.

    An excellent precis Stephanie.

    A higher rate of inflation is inevitable, especially with a possibility of more QE and rising global commodities prices, leads me to suggest inflation will play a pivotal part in deficit reduction.

    Inflation is the gesthalt bit left unspoken in this Budget and it has every prospect of easing the governments deficit but not a lot of help for the electorate.

  • rate this

    Comment number 37.

    I think politics is scary - "of the devil" as Bob Dylan said not so very long ago.

  • rate this

    Comment number 36.

    Deficit is easy to solve.. #1 Disband the quango's. #2 Fill the next generation of Trident missiles with fresh air but keep it a secret. #3 Sell British passports at 50k a pop. #4 Lease the Falklands to the Argie's. (Oil rights not included) #5 Give an amnesty to the long term prison population in exchange for 50k and a pledge they will move to the Falklands. Have a plan for the national debt to)

  • rate this

    Comment number 35.

    Stephanie, in your opinion has this coalition government done anything at all that you approve of? and how long have you been a card carrying member of the labour party?

  • rate this

    Comment number 34.

    GO is a kind of anarchist genius.
    He believes in creative destruction and has a strategy which he will follow to the bitter end. He wears a suit, the better to embed himself within the establishment.
    Standing amidst the ruins he will declare, "success!"
    Building something new will be someone else's task.
    I am surprised that the real "authorities" allow it.


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