Sunday, June 20, 2010

Budget Responsibility

Early bath for the team but no early pension for anyone

Back from France, which despite our close and painstaking investigation, still manages to baffle.

Take the fiscal crisis. Just like us, they are wrestling with a deficit. But whereas ours is 11.5% of GDP, theirs is only 6.9% (latest OECD forecast for 2010). Despite the fact that they're the ones whose government has always spent money like water - government spending is 55% of GDP this year, even higher than ours.

Last week the French TV news reports were full of Sarko's formal announcement that their state pension age is to be increased. But whereas Cam is trying to find some way of telling us ours will soon move to 70, the French are rioting over having to accept an increase to just 62. 62!

Still at least Les Bleus have flopped in South Africa, causing much wailing in les rues and subjecting the French nation to appalling humiliation in the eyes of the entire world. Thank God our guys would never do that to us (how've they been doing, by the way).

So what's been happening here since we've been away?

Plenty of pre-budget spin, obviously, and it sounds like George really is going to go for the full austerity package straight off the bat. Good.

Last week also saw the publication of the Office for Budget Responsibility's first ever Pre-Budget Report. While not yet quite the finished item, it's a vast improvement on anything we've ever been given before.

To start with, the economic assumptions are properly explained, and there is an explicit recognition of the uncertainty surrounding the central projections. The fiscal projections also feature an explicit range of possible outcomes, neatly summarised in a Bank of England style fanchart:

Thus, on the basis of current policy, the OBR forecasts Public Sector Net Borrowing (PSNB) in 2014-15 of 3.9% of GDP, down from 10.5% this year (2010-11).

However, there is a 50% chance it will be higher than that, and around a 25% chance it will be higher than 6%. Which suggest George needs to err on the side of bigger rather than smaller cuts - especially since the OBR also notes that previous budget forecasts going back to 1987 have on average been far too optimistic (quelle surprise).

The OBR also spells out some of the spending detail signally omitted from previous budget publications.

For the first time, they include the controversial numbers for debt interest payments (forecast to increase from £42bn this year to £67bn in 2014-15).

They also break down total spending out to 2014-15 into Departmental Expenditure Limits (DELs) and Annually Managed Expenditure (mainly welfare benefits). Unfortunately they can only give the figures implied by Darling's last overall spending projections since new ones have not yet been set (they've used a very similar residual methodology to that previously employed by the IFS). But the projections are still striking.

In particular, the OBR says that current plans imply a £6bn cash cut in Departmental spending by 2014-15. Adjusting for their inflation forecast (GDP deflator), that implies a real terms cut of over 10%, or around £40bn pa.

And do you know what that means?

It means that to fill his c£80bn fiscal hole, George needs to find the same again from somewhere else.

Which is why welfare is squarely in the firing line.

And why we still feel very nervous about his tax plans.

PS The scariest table in the OBR's report is not concerned with the short-term fiscal outlook at all. It's a summary of the burden we are facing over the next four decades from our ageing population (Mr and Mrs T included). It shows the increased proportion of GDP currently set to be gobbled up by public pensions, healthcare and long-term care. Total age-related spending is set to increase from 22.5% of GDP last year to over 26% by mid-century. Which means pushing up the retirement age to a mere 70 may not be enough:

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