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
    +3

    Comment number 613.

    611.sportingmac.Your comment 609 is self-evidently true.

  • rate this
    +2

    Comment number 612.

    Damien, I might have upvoted yours because I sympathise a lot, but the real point is: what do we do?! We need to defend our space to maintain our lives as best possible. Make ourselves ungovernable. Support those close to us who agree. Above all, stop giving power (in the form of debt) to those shysters who'd hang us with the inch of rope they give as they take back their mile and pound of flesh.

  • rate this
    0

    Comment number 611.

    Balls the Bumbler - shut up - you need to get a job in reality before offering economic comment again.

  • rate this
    +2

    Comment number 610.

    An elderly resident of Pathos has been doing something odd 4 the past few weeks. Every Fri she goes to the bank& withdraws all of her money, then returns it on Mon. When asked why she told the laughing bank employees

    “My son is an economist in Russia &he has been telling me, if something happens with the Cypriot banks, it will happened on the weekend. He told me 2withdraw the money every Friday

  • rate this
    +1

    Comment number 609.

    Thre ar som vry srious F8Wits ptting coments on this site

  • rate this
    +3

    Comment number 608.

    The UK is run by morons, being the tories. We have to get rid of this arrogant, self opinionated government now, or by 2015 there will be nothing salvageable left. You only have to look at the mess they created under thatcher, god help us.

  • rate this
    0

    Comment number 607.

    No602 Damien,
    Strategy from the 'pasty' chancellor, 'omnishambles George', you are of course joking.
    No government ever increases its share of the vote at following elections,
    The bookies have stopped taking bets, opposition calls.
    The Bullingdon louts have been a disaster for the party and the country. Sadly they are in a position to do further damage to the well-being of our communities.

  • Comment number 606.

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

  • rate this
    +2

    Comment number 605.

    No603 The North,
    That went without saying.
    However, I do recognise it was a serious failure on my part.

  • rate this
    +3

    Comment number 604.

    Constrained? CONSTRAINED?

    Either these Tory clots are too young or too well-heeled to have been affected by the last recession under a Tory Guvt but they have no more in place to deal with it than in the 90s. No fall-back, no action plan. COBRA could run the economy better that Osborne. He's a moron. The UK economy just isn't strong enough to cope with the strain he is putting on it.

  • rate this
    0

    Comment number 603.

    @Tory Boy
    The only part of your comment I disagree with is that the country deserves better, not the party.

  • rate this
    +5

    Comment number 602.

    I think the long-term political strategy is now becoming clear for the Tories.Not a cat in hell's chance of winning the next Election.So,let's continue to destroy the economy; let Labour pick up the pieces and because of their unavoidable tax rising/cuts programme give us a real re-election opportunity in 2020.Shame on these Buller boys for wreaking havoc with 'ordinary' people's lives meantime.

  • rate this
    +1

    Comment number 601.

    For 599. feedbackloop:
    Point taken, but renting is still possible. I do it. It's no less secure than a mortgage. I prefer it, it's less risky. If govt should do anything, it's to reduce risk to let people have shelter, space for tools and materials to maintain stuff. Throwaway 'culture' and waste has built dependency on foreign supply. We need to reverse that instead of making people powerless.

  • rate this
    +1

    Comment number 600.

    No595 The North
    You are right re 'Pasty George'
    Clearly not up to the job,
    Quintessential novice,
    Overgrown schoolboy,
    Experienced bag carrier,
    Class warrior,
    Suffering from 'petrified adolescence'
    Failure,
    Unfit for purpose.
    The party deserves better.

  • rate this
    +2

    Comment number 599.

    573 Crow very few UK home 'owners' own their homes free of mortgage. House prices have been inflated by debt that now and exceeds the ability to pay via productive labour unless interest rates are lower than the risk value of the money. There no way to deflate the debt without further damage to demand- but no way to recover unless it is deflated. A Zombie economy.

  • rate this
    +2

    Comment number 598.

    He should have introduced a tax on high net worth individuals, in other words a wealth tax based on net positive assets, not income or just house prices.
    The rate could be 2.5% on wealth up to £0.5m, 5% from £0.5 to £1m, 10% from £1m to £2m and 20% on net worth over £2m.
    I have calculated that this would pay off the National Debt of about £1.4t.
    Job done.
    .Alan

  • rate this
    +2

    Comment number 597.

    Condescending electioneering budget. Penny off a pint of beer may have some popular appeal, but at pub prices equates to buy 350 get one free!

  • rate this
    -1

    Comment number 596.

    Does anyone care if someone wants to buy a 2nd home?
    In society there is a spectrum (Bercow's *kaleidoscope*) of people, ethnicity, wealth, knowledge, power.

    If you are at one end of that spectrum, you need to know is that there are others at the other end. Unfortunately there is an organisation in the UK that wants to re-engineer society. That organisation is led by the clown Ed Miliband.

  • rate this
    -1

    Comment number 595.

    I'd say Osborne, like most of his colleagues, is chiefly constrained by dogma, intellect and self interest.

  • rate this
    +2

    Comment number 594.

    @590Crow re 588 BdV
    Yep ! The only value people see today is MONEY, and that is virtual, fiat and chimeric.
    People come way down on the scale of values.
    People are more concerned with immediate individual pleasure than any altruistic longterm projects.Our communities are broken, there is no intergeneraltional understanding, and we let our OAPs starve and freeze...
    'Advanced' / 'Civilisations'...

 

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