George Osborne will tonight return from Brussels bringing peace with honour. He says he has agreed to hand over just £850 million to the EU, rather than the £1.7 billion it asked for, as a penalty for having the fastest economic growth in Europe. If true*, how did he wangle it?
I have a theory. He could have told the EU that yes, the UK has pretty strong growth – over 3 per cent this year and next. In theory, this leaves the UK better-able to pay bills. But not this time. Quite the reverse: the deficit is actually going up right now – a bit of an embarrassment for a Chancellor who asked to be judged on his performance on tackling it.
In fact, Britain now stands as the greatest debt addict in Europe. That is to say that we have the worst structural deficit in the whole of the debt-addled European Union as the below graph shows.
There may be a jobs miracle underway, but these new low-paid jobs cost the government almost as much as unemployment due to the way that Treasury’s tax credits are structured. Michael Saunders at Citi spells it out in a superb new note published today: the UK government has to fork out £53 per week in tax credits for a single person on low pay. And this is not much better than the £72 per week that they’d get in Jobseekers’ Allowance. As these new jobs are concentrated in the low pay sectors, this jobs miracle is costing a whack.
So what Brussels should understand is that Britain’s “recovery” is one that looks good in the GDP figures, and the jobs figures, but still leaves Osborne flat broke. He’s in the weird position were he has way more people working than he thought, but that massive increase in income tax revenues that he predicted in his last budget (in pink)? Nowhere to be seen, as the below Citi chart shows:-
So Osborne is genuinely not extra rich as a result of this extra growth. He is still hopelessly behind on his deficit forecasts. His pre-Budget report next month will have a slug of bad news on that front. But a bit less now that the EU has decided to add a mere £850 million to our national debt instead of that £1.7 billion.
PS If I were Osborne, I’d try to make a virtue of this and say that debt is rising so fast because he has decided to subsidise – or, rather, invest in – jobs. The disconnect between growth and revenue is now so spectacular that he’ll have to explain it one way or another.
* Unkind souls are suggesting that the £1.7bn bill was a gross figure, presented before the rebate which would have halved it anyway. And that Osborne has simply presented the net figure, without having negotiated a penny reduction.