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

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  • rate this
    -2

    Comment number 113.

    111 ~ There is investment and some terrific growth from it, that part of the economy is doing better than rather well. 11% growth (average) on investment returns. http://www.telegraph.co.uk/finance/personalfinance/investing/9815288/British-companies-to-raise-dividends-by-11pc.html

    Growth in return on your labour is negative. Assets such as property seem to be holding up.

    The economy is diverging

  • rate this
    0

    Comment number 112.

    Slowly but steadily as time goes by the fundamentally flawed system is to swallow UK like no other. The irony is that US is in worst shape with close to $20 trillion Federal Deficit and over $17 trillion debt owed the Chinese, Arab / Others. Essentially these politicians not only lie to nation but to themselves and the masses bear the burden.

  • rate this
    +3

    Comment number 111.

    @104. purple...

    In English please !

  • rate this
    +1

    Comment number 110.

    What do you expect from this unmitigated disaster of a school boy chancellor ? Some common sense. The man is a "fool for all seasons" and should be locked away from public gaze to save further embarrassment to this inept Tory led government.

  • rate this
    -8

    Comment number 109.

    There are arguments for and against austerity and terrific coverage and thus knowledge of what it is and its effects. We all know the government is cutting debt by increasing it 50% because only RoE is growing, (see 104) BUT

    What is the point of it? Why are we doing it?

    We are austere.... being austere..... why? Why, why?, why? l forget?

    San Marino 4 - 1 England. Now that's Auxerre

  • rate this
    +2

    Comment number 108.

    104. purple " There is considerable growth "

    And I thought it was just the economists & politicians who lived in that parallel universe. Stop using that jargon, just say it as it is, the rich have seen growth. The rest & the economy at best, are bottom lining. Time they all stopped hiding behind the trade jargon, and just said it's a mess, we don't have a clue what to do. Just hoping really.

  • rate this
    -9

    Comment number 107.

    The growth we have is tax free, in Uk (see 104). No one seems to blow loud trumpets about it, oddly. Surely growth is growth or is there bad growth? 0ne for the ladies, l guess.

    I was surprised there is so little support for fracking, its expensive drilling in the garden and dropping in a half ton of C4ͺ We can all be gas barons unless a sewer pops up. Yuch..... thar she blows. Gas for all!

  • rate this
    +1

    Comment number 106.

    An excellent budget. Fiscally neutral representing the fact that we have no money. Reduction of the jobs tax leading to a forecast of 600,000 extra jobs in the comming 12 months. New homes building at a 20% discount for first time buyers, driving up construction and reducing the price of existing homes as the supply of homes increases.

  • rate this
    0

    Comment number 105.

    It's bad and likely to stay that way. More cuts will not solve recession. Eventually human spirit will triumph in spite (but never because) of political influence. The only real solution is to get rid of the grave distortions between contribution and reward, but that's *unlikely* to happen coz those empowered to do so will be the biggest losers.

  • rate this
    -11

    Comment number 104.

    97. Am I having fun yet ~ the down side is inflation.

    103. Free speech_ will be taxed soon ~ There is considerable growth in earnings which are expected to rise 11% That's RoE and part reason why wages are negative growth. There is actually a squeeze occuring combined with austerity, billions by tens lost to capital flight and TE and stock market stuck on the 64th floor. There is growth.

  • rate this
    +9

    Comment number 103.

    Luckily I'm not an economist, I don't get bamboozled by charts & graphs or dubious data. Most of the 60,000,000, know their disposable income is shrinking or non existent & getting worse. We won't save or invest & we cut back on spending to pay the essentials. Why can't Politicians & Economic advisers understand there's no growth, unless people spend ( not debt ) earnings.

  • rate this
    -4

    Comment number 102.

    The NHS faces a £15.7 billion bill for clinical negligence, MPs disclosed last night. Equivalent to 14% of health service’s annual budget, the money has been signed off for care of tens of thousands who suffered due to blunders in hospitals.

    http://www.telegraph.co.uk/news/politics/9065534/NHS-facing-15.7bn-for-rising-number-of-clinical-negligence-claims.html

  • Comment number 101.

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

  • rate this
    +1

    Comment number 100.

    A picture paints a thousand words:
    http://monevator.com/wp-content/uploads/2011/12/house-price-earnings-graph.jpg

    Form your own opinion as to whether it's wise to inflate this bubble.

    Also bear in mind this is all "off balance sheet" so it's a cunning (but debt fueled) lever the Govt can use without it actually appearing to spend any money. Magic.

  • rate this
    +16

    Comment number 99.

    Economics is at best a pseudo-science, at worst a guessing game.

    How often have the OBR been correct? They guess based on:
    - What the current trend is
    - What they/paymasters hope for

    I'm not an economist, but I can confidently say that given current policy making, the UK will not see any significant growth for a good few years.

    Politicians haven't got the courage to tackle the underlying issues

  • rate this
    +10

    Comment number 98.

    Capricious politicians of all hues have bankrupted this country with

    - £Trillions spent bailing out psychopathic banksters
    - £Billions spent on a decade of illegal wars
    - £Billion lost in corporate and off shore tax loop holes
    - £Billions wasted on a shameful welfare system that leaves thousands parked on benefits.

    The hard working majority continue to pay but for how much longer?

  • rate this
    +3

    Comment number 97.

    I'm employed, in the higher tax bracket and according to the BBC Budget Calculator I'm going to be £469.00 pa better off.

    A comparison of an unemployed person on meager benefits applying the same calculator comes out at £346.00 pa better off.

    A married disabled person will be £553 pa better off as per the calculator!

    Someone point out the downside to that if they would !

  • rate this
    +2

    Comment number 96.

    Economists like to pretend that their discipline is a science because they can use fancy maths to get their forecasts - hopelessly wrong. Economics is, objectively and measurably, not scientific. Monetarist this, fiscal that; it's all complete balderdash. Don't believe me? So what have 'economists' got right in the last 50 years? Nothing - it's going from bad to worse and accelerating rapidly....

  • rate this
    +1

    Comment number 95.

    Public sector moan that they're stuck with 1% pa increases (good deal in the private sector) but they don't tell you that most are on incremental increases in salary grades every year. Instead of strike action they should keep their heads down - like Mr Clegg who doesn't talk too much about his excessive deferred EU pension and his gold plated Govt. pension The real workers are paying for all this

  • rate this
    +1

    Comment number 94.

    93. empiredown

    Even I am not that pessimistic.

    There is clearly an issue with a rapidly rising population versus diminishing resources, once we have finished raping the planet of it's resources (or perhaps once it becomes clear big business needs to invest in renewables) then I believe things will change. However this will cost and power will still be in the hands of the major corps. Sadly.

 

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