George Osborne just managed to turn what could have been an embarrassing u-turn into a bit of a triumph.
Despite rolling back one of the major policies that he announced just five months ago, most of the immediate reaction to his Autumn Statement seems to be surprisingly positive. He’s revealed some extra spending few people were predicting, and the cuts overall are considerably shallower than expected.
But he’s also not expecting to run up a larger deficit — the projections for the UK’s public finances are pretty much how he left them at the July Budget. So how did he do it?
It’s all down to two words: underlying forecast. George Osborne hasn’t been saved by any clever new ideas, or by the ineptness of the Labour party. He’s being saved by the guesswork of some econometricians.
Here’s the Office for Budget Responsibility on how its outlook for the years ahead has changed (emphasis ours):
Taken together with the other measures in the Autumn Statement, the Government has announced a net fiscal giveaway of £6.2 billion next year, more than half of which is the cost of reversing the tax credit cut. This outweighs a £2.9 billion improvement in the underlying forecast in that year and thereby pushes up the deficit. The giveaway is similar in 2017-18, before declining steadily to £2.2 billion in 2019-20, by which point an £8.0 billion increase in total departmental spending is largely offset by a £7.2 billion net tax increase (mostly the new apprenticeship levy and larger rises in council tax). These giveaways are smaller than the improvements in the underlying forecast in these three years, delivering smaller deficits and then a bigger surplus than in July.
Here’s the chart that shows what’s going on:
Ignore the green bars — they’re there because housing associations are being shifted from one statistical category from another.
Those yellow bars are new government decisions on spending which have made a surplus harder to achieve — tax cuts or spending increases that would usually add to government borrowing.
The blue bars are what’s important here. Those are changes to the OBR’s underlying forecast — basically, how it expects the fiscal situation to develop based on their expectations for the economy.
So for the first year, there’s a spending surge (compared to July) with little change to the underlying forecast. But in the next four years, the underlying forecast’s improvement outstrips the government’s plans to spend more, meaning that the public finances are projected to be closer to balanced than they were before.
You can see here how that’s affected forecasts for tax revenue, for example in terms of VAT:
The new underlying forecast gave Osborne an impressive £27 billion ($40.73 billion) in wriggle room compared to what he had at the time of the July budget. He used up most of that with £18.7 billion ($28.21 billion) in changes. A large part of that is his decision to scrap tax credit cuts that he had previously planned.
Since he’s pledged to refrain from raising most of the UK’s major taxes, and not to cut many big-spending departments’ budgets, a lot of people (including myself) couldn’t work out how Osborne would square the circle on Wednesday. As it turns out, he didn’t really need to — and he can thank the OBR for that.
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