As ever, the story of the Budget was hidden in the small print. There are no hidden tax rises, but the story isn’t really in the tax. It’s about the cuts to come, the incredible jobs recovery and the games already being played for the general election campaign. Here’s my take:-
1. The rollercoaster of cuts to come:-
The OBR has rather huffily pointed out the weirdness of the cuts planned for the next four years: a ‘rollercoaster,’ it says, devoid of logic. After the election, cuts will be four times sharper than those implemented in this (election) year. Then most weirdly of all, right at the end, spending soars. The OBR says:-
‘A much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years followed by the biggest increase in real spending for a decade in 2019-20.’
The OBR obviously thinks this is bonkers, and rightly. there’s no economic reason to plan cuts in this way. No normal company would behave in this way: to actually plan massive cuts one year, followed by sharp increase the next. It’s pure politics.
But note how the worst cuts to government departments are yet to come. The Tories loathe the above OBR graph as much as Labour love it, by the way, and say it doesn’t factor Osborne’s planned £12bn of welfare cuts nor the haul they envisage from cracking down on tax avoidance (which is the new ‘cracking down on waste and efficiency’).
2. Look, Ed Balls! Spending no longer heading to 1930s!
So why did Osborne pencil in that weird spending splurge in the last year, 2020? Well, as things stood his target for 2020 spending took the state spending/GDP ratio to 35.7pc. But what he didn’t realise back then was that this percentage was just lower than Gordon Brown’s record low: 35.9pc. This allowed Ed Balls to play a rhetorical trick: to say that the wicked Tories would take spending ‘back to the 1930s when there was no NHS’. This is nonsense, Labour have focus-grouped this attack line and it goes down well.
Osborne hadn’t seen this attack line coming; amusingly, he was so keen to play the fiscal hard man that he hadn’t realised he’d walk into Balls’ trap. And all for spending of 0.2pc of GDP! So now he has now decided to jack up spending (hence the ‘roller coaster’ in Graph 1) and says he’ll settle for a £7bn surplus in 2019/20, far lower than the £23bn surplus he wanted in December. So this means he’ll hit 36.0pc, a tad above Brown’s 35.9 per cent. Thus denying Balls his 1930s soundbite. Ah the games, the games.
3. Putin’s favourite graph: cuts + protected departments = defence butchered
You get the feeling that the OBR doesn’t like ring-fencing, and its graph above shows the implications of protecting health, schools etc. It means that any non-protected departments (police, defence, communities, culture) can expect to be butchered once the real cuts details in graph 1 get going. This explains why David Cameron is so reluctant to commit to spending 2pc of GDP on defence: he has made so many promises that he can’t make any more. As Philip Hammond memorably put it, ‘there are no votes in defence’.
4. National debt – still damn high. And way above the Labour plans that Osborne once considered dangerously high.
During his Budget speech, Osborne laid it on thick about how debt/GDP ratio would be falling. He managed to engineer this fall by flogging a few state-owned assets. But things hadn’t changed much, and he is still way adrift from his original target. But he can get away with more debt because…
5. Borrowing costs are so low that Osborne is borrowing more, but paying far less interest.
Osborne is well adrift from his targets on debt and deficit. But the bond yields (i.e., the interest he is paying) have fallen sharply, so he’s paying far less in debt interest. It’s a global phenomenon, and one that has saved the Chancellor’s bacon. The collapse in global bond rates are a get-out-of-jail free card. This is why he has given himself an extra four years to balance the books.
6. The jobs miracle – better than anything in the Budget.
The tax cuts and welfare reform have conspired to give Britain the best jobs growth in Europe. Osborne said in his speech that Yorkshire had created more jobs than France and he’s right. The corner shop down the road from my house has also created more jobs than France insofar as it employed more one person last year: employment in France fell.
But it’s a sound overall point, and one I make in a cover piece for the new magazine, out tomorrow…
7. Osborne now milking rich more than any Labour Chancellor did but what he didn’t say is that he did this by cutting the top rate of tax.
8. Five jobs created for every one public sector job shed A ratio that Osborne did not dare imagine.
Ed Miliband (see video, above) predicted that a private sector job would be lost for every public sector job lost. Osborne has demonstrated that you can create a jobs boom in the middle of an austerity drive if you cut taxes and reform welfare.
9. Savers’ real problem: no return on investment.
After his bungs to pensioners, Osborne is now offering to bung £3k to first-time buyers to compensate for their inability to get a decent return from a Cash ISA. Savers will be able to deposit up to £2,400 a year in a new Help to Buy Isa, and Osborne will top it up by up to £3k when it’s sued to buy a house.
Also, no tax on the first £1,000 of interest on bank interest, or £500 for higher-rate taxpayers. Yada yada yada. It’s a poor substitute for having a properly-functioning savings market.
10. The collapse of North Sea oil revenues which poses an obvious threat to any independent Scotland.
The solid lines are the old estimates, the dotted line is the new estimate – i.e., a 90pc drop. Osborne made much drama about staging a rescue for the industry: cutting petroleum revenue tax from 50oc to 35pc. Only the UK can do this, he said.
Politicians should leave the wealthy alone – they already contribute more than their fair share
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