British chancellor George Osborne is in traps of his own devising

Steady reduction in corporation tax suggests government is trying to turn UK into Ireland

Chancellor of the Exchequer George Osborne speaking in the House of Commons.

Chancellor of the Exchequer George Osborne speaking in the House of Commons.


What was the purpose of yesterday’s Budget announcements? One aim was to escape the painful implications of the Office for Budget Responsibility’s new forecasts. A second goal was to advance a new slogan: after years of cosseting the elderly, the government now says it plans to “put the next generation first”. A third objective was to spray policies upon the nation, the most important of which - abolition of local authority control over education - had nothing to do with fiscal policy.

In all, George Osborne is looking increasingly like Gordon Brown, his Labour predecessor but one: both the master of the government’s domestic policies and a purveyor of catchy gimmicks. Nothing that the chancellor of the exchequer announced in the Budget is of great relevance to the economic or fiscal health of the country. Indeed, on balance, the UK would have been just as well off without it. This is not to say that none of the individual measures is worthwhile. But they could have been proposed and justified far better outside a budgetary framework.

For reasons known only to himself, Mr Osborne decided to target an overall fiscal surplus by 2019-20. Just four months ago the OBR told him he was probably on target to achieve this objective. Now it has revised down the potential growth of productivity substantially. This may well be right: in truth nobody knows precisely what the potential rate of growth is going to be. As a result the OBR has revised up its forecasts for the budget deficit by 0.5 per cent of gross domestic product, or £11.3 billion a year, on average over the forecast period - before the fiscal measures announced yesterday. Consequently, states the OBR, “the government would have been on course to miss both its legislated fiscal targets - for the budget to be in surplus from 2019-20 and for debt to fall in relation to GDP every year until then”.

Targeting the difference between two large, highly uncertain numbers - total spending and receipts - for a particular date several years hence is a fool’s game. But that is how the chancellor has sought to prove his fealty to his “long-term plan” for fiscal probity. Having taken on an unwise target, he now has to employ smoke and mirrors to achieve it. One of the great merits of his creation of the independent OBR is that it makes it so transparent how he plans to do this.

The OBR now forecasts a £13.4 billion deterioration in fiscal outcomes for 2019-20, largely the result of a £16.3 billion reduction in revenue from a smaller economy. This is partly offset by a notional £2.3 billion fall in departmental current spending, largely driven by £3.5 billion in unspecified efficiency cuts.

So far, so murky. The government also plans to impose £2bn in additional pension contributions. Now come the fascinating parts of the new plan. Departmental capital spending is to be reduced by £1.2 billion in 2019-20, essentially by moving £1.6bn forward to the two previous years. Does this change anything meaningful? No. Yet more slippery, the government has announced a £6.3bn increase in taxes for 2019-20. Yet this is solely due to a shift in the timing of receipts from corporation taxes. This, too, lacks any economic meaning. The government has also announced bigger spending cuts in spending for 2020-21. Maybe Mr Osborne expects to be doing something else by that remote date.

All this creativity cannot obscure the fact that cumulative borrowing is forecast to be £36.3bn higher between 2016-17 and 2018-19 than it was in November. Does this matter? No: there is no real sense in making big changes in fiscal plans in response to unexpected shifts in the OBR’s uncertain expectations about the future.

The chancellor’s claim to put the “next generation first” helps illuminate the absurdities of his approach. If this were his aim - it is not, as the long- established solicitude for the older generation demonstrates - the government would, for a start, look at the assets it is creating as well as the debt. That would require him to decide not just on a target for debt but also on one for public-sector net worth. He would have regarded today’s ultra-low interest rates as an opportunity for a big jump in public investment. Similarly, he would be considering how to raise investment in housing and lower house prices. Among other things, such a focus would bring up aspects of fundamental tax reform, especially the possibility of shifting taxation towards land and away from earned income. In that context, proposed reductions in business rates would be seen as the wrong idea.

Inevitably, any proposals for coherent and worked out reform of the tax system, or of pension arrangements, or indeed of any policies that affect long-term decision-making will be viewed as naive. But this relentless piling up of one fiscal gimmick on another makes it almost impossible to work out what the government is actually doing to the economy. Policymaking could, and should, be vastly better than this.

On the details of new policies, there is, as always, too much to be taken in. But the argument for raising tax thresholds weakens with each successive rise since, by definition, it gives no benefit to those who already pay no tax. The steady reduction in the headline rate of corporation tax suggests the government is trying to turn the UK into Ireland. Is that desirable? The cut in capital gains taxes will also create big incentives for turning income into capital gains; and there is no good case for failing to raise fuel duty when oil prices have fallen so far. It looks as though the 2015 climate change agreement never happened.

Fortunately, aspects of the UK economy work well - notably the labour market, as Mr Osborne proudly notes. So does the monetary framework he inherited from the opposition Labour party. Both are the fruit of decent policymaking over long periods. It would be splendid if the UK could do the same for the tax system, land-use planning and the regime governing savings and pensions. Getting rid of the short-term cycle of budgetary announcements could be a step towards that aim.

But, so long as the Budget dominates economic policymaking, the focus will be on catchy announcements rather than fundamental reforms. Will any chancellor admit that the country could do better than this? – (Copyright The Financial Times Limited 2016)