From the TUC

#Budget2015: A review of how the Chancellor manipulated the figures to political ends

20 Mar 2015, by in Politics

At the Autumn Statement in December last year, the extent of the failure to reduce the deficit was laid bare. The Chancellor took a political hammering for the extent of future cuts that he had planned to set matters right (leaving aside the implausibility of it working).

With the public now sick of austerity, the political imperative on Budget day was to dress up the same cuts as something different, and the general climate as one of achievement and prosperity. Some leader writers have permitted him some success, not least the Financial Times: ’Osborne plots a slightly gentler path out of austerity’ & ‘Osborne eases austerity in bid to spike Labour’s election guns’. 

The real imperative is for the public to be aware of what is actually going on. Over the past two days we dealt in various pieces with the unchanged scale of the cuts and the unchanged extent of the damage they will inflict (as well as many other issues). Today, I want to look more closely at how the deception has been crafted.

1. Spending and the public deficit

Most offensive and difficult to the Chancellor has been the Office for Budgetary Responsibility charge that he was taking public spending back to the 1930s. This followed from chart 3.36 in the Autumn Statement:

cooking1 

His repair job was complicated by various changes to the economy and public finances forecast. Normally the OBR’s main forecast changes come at the Autumn Statement, and very little changes at the Budget. But on this occasion the sharp and unanticipated fall in inflation has meant bigger changes than normal in the detail. In particular government revenues were reduced for example as lower inflation / oil prices affected North Sea oil revenues and excise duties. But acting in the opposite direction, government spending also fell, with for example lower than expected debt interest payments and lower welfare costs (because of lower uprating). The sum of the parts was effectively a slight net loss to the Chancellor, leaving the public deficit marginally bigger.

Matters were set right with a change to what the OBR are calling the ‘spending assumption’. In each of the three years from 2016-17 to 2018-19, the Chancellor removes an additional £2bn from spending (i.e. increasing austerity), and then adds in £20bn in 2019-20 (reducing it).

In literally a few keystrokes, the Chancellor granted himself two proud new claims. 

First, in his own words, “The deficit is lower in every year than at the Autumn Statement”. (He meant as a share of GDP; it is untrue in cash terms).

The chart shows the balance of changed receipts and spending (including the trivial amounts for the total of new policy measures) increasing the deficit in the three middle years of the forecast (the dotted line) and then restored to a reduced deficit (solid line) over the same years by the negative spending adjustment. This is in cash terms, with the increased deficit in the final year obvious.

Changes to the forecast for the public sector net borrowing, £ billion

 cooking2

Source: OBR presentation, slide 23

Second, the big change in the ‘spending assumption’ in 2019-20 resolves the pesky OBR spending comparison above. And the Chancellor claimed:

For those interested in the history of these things, that will mean state spending as a share of our national income the same size as Britain had in the year 2000.

Leaving aside year 2000 for the moment, the new chart shows this measure of spending as a share of GDP now (taking an annual average) rising to 16.2 per cent of GDP in 2019-20 from 16.0 per cent in 2018-19, i.e. a rise of +0.2 percentage points. Previously (on the first chart) it fell to 15.0 from 15.6 per cent, i.e. a fall of -0.6 percentage points. £20 billion of spending is worth 1 per cent of GDP in 2019-20, and comfortably explains how a fall was engineered into a rise between the two years (1 being less than 0.2+0.6).

cooking3

The OBR now says that this spending “would still leave government consumption as a share of GDP equal to its level in 1964 and would be the joint lowest level in consistent National Accounts data going back to 1948” (para 3.99). The press were seduced into various headlines; again the FT led the way: “Chancellor avoids road to Wigan Pier but rivals see return to swingeing ‘60s”.

(But as seen the Chancellor went further, claiming public spending is only back to 2000. Here he is choosing to ignore the OBR measure on which all the commentary has been based, and look instead at ‘total managed expenditure’. ‘TME’ is a broader spending aggregate, reflecting also gains for example from lower debt interest payments. The measure on the OBR charts includes all government spending on goods and services, and is as good a way of looking at public service spending over time as is available.)

Either way, the ‘spending assumption’ in 2019-20 corresponds to nothing; it is simply a book entry or keystroke for a distant year. Even if we take it seriously, as Paul Johnson of the IFS pointed out, previously the government wanted spending to fall as a share of national income and now it rises with  national income (“the apparent change in economic philosophy in the three months since the Autumn Statement is pretty remarkable”). More importantly, the technique also maxes the cash figure without increasing the deficit as a share of GDP – critical to the Chancellor’s first boast.  

In his very helpful presentation of the figures yesterday, Robert Chote the (seemingly-increasingly-exasperated) boss of the OBR pondered:

Why has the Government done this? Well one consequence is that public services spending is no longer set to fall to its lowest share of GDP since before the war, as it was in our December forecast.

i.e. it’s purely political.

With that said, he reminds us too of the intensity of the austerity to come:

But the squeeze then becomes much more severe than anything we have seen to date in 2016-17 and 2017-18.

(Now subsequently a different debate has emerged, with the Chancellor distancing himself from his own independent forecaster, and claiming he does not intent to make the extent of cuts to public services implied by the OBR figures but instead will rely also on cuts to the welfare budget and savings from tackling tax avoidance (at the same time implicitly recognising the importance of public services in spite of making his second claim on the basis of another measure). The OBR has not included this money in the figures because the Treasury have provided no adequate details for how these cuts will be achieved. While debate around this unexplained £12 billion is important, there is far more to the Budget than this.)

2. The public debt

But the spending tricks were not enough for the Chancellor: much better to conquer a fiscal target as well. No way could the deficit improve since the autumn relative to targets – that left debt.

Now it is very difficult to improve on public debt if the deficit is basically unchanged. So the Chancellor reached instead for the family silver. (Though given the majority of these were the government’s investments in Lloyds Bank and instruments related to Northern Rock, ‘silver’ may not be entirely appropriate.) An asset sale has been hastily arranged for 2015-16, when the government will raise an additional £20 billion. This allows the public debt to income ratio to fall by 0.2 percentage points of GDP between 2014-15 and 2015-16 (from 80.4 to 80.2). Previously it rose from the same 80.4 to 81.1 (+0.7 ppts). £20 billion is 1.1 per cent of 2015-16 GDP (and again less than +0.2+0.7).

Again Robert Chote is at pains to point out that

… we are no more optimistic about the primary budget balance now than we were in March 2013. The Government is back on course in part because the difference between interest rates and GDP growth is expected to be more favourable. But the main reason is that there are a number of factors reducing public sector net debt next year that do not reduce borrowing, of which the sales of financial assets are the most important.

3. Living standards

Of course the other rabbit from the hat was the living standards claims, which we dealt with on Budget day. To put it another way: the average experience over a 5 year parliament is for peoples’ incomes to increase by 12 per cent in real terms; in this parliament they have increased by 1.4 per cent. Moreover separate figures also show that for people of working age, incomes have actually fallen; the total is held up by pensioners. In addition, the OBR also show (chart 3.28) that any increase of living standards into 2015 follows not from increased growth in labour income but from falling inflation.

People are not richer. Nothing changes the implied severity of the cuts revealed in the Autumn Statement. Even since then, cuts are intensified, except in 2019-20 as a result of fictional keystrokes. In characterising the implied contortions in public spending as a ‘roller coaster ride’ the OBR have rightly distanced themselves from this political charade.