In case you missed it, OBR chairman Robert Chote was in fine form last week when giving evidence to the Scottish Parliament’s Finance Committee. Remember that money the OBR found behind the sofa at the end of last year?
Following the Autumn Statement, lots of people latched onto the £27 billion that we had apparently found down the back of the sofa over the next five years.
Unfortunately, says Mr Chote, changes to the forecast for GDP and tax revenues could quite easily wipe it all out.
[T]he underlying changes we have made to our budget deficit forecasts between previous March Budgets and Autumn Statements were deteriorations of around 11⁄2 per cent of GDP in 2011 and 11⁄4 per cent in 2012, an improvement of 3⁄4 per cent in 2013 and a deterioration of 1⁄4 per cent in 2014. The lesson is that what the sofa gives, the sofa can easily take away.
That could be a bit of a problem because:
The tax increases and welfare cuts build up gradually – and less quickly than the Chancellor said he would aim for ahead of the election. So he has also decided to borrow more over the next three years to help reduce the severest squeeze on public services spending during the middle years of this Parliament. Then he aims for a slightly bigger budget surplus in the medium term as the mounting tax increases and welfare cuts eventually outweigh what are by then smaller increases in public services spending.
Helped by the modest improvement in our underlying forecast, this leaves the Chancellor on course to achieve his new target of delivering a budget surplus in 2019-20 (and beyond) with a margin of around £10 billion in that year. Past forecast errors suggest that this implies a roughly 55 per cent chance of delivering a surplus in that year on current policy, so by no means a done deal.
The trouble is, during the last parliament, most of the fiscal consolidation was done by cutting public service spending. Over this parliament, though, welfare cuts and (presumed) increased tax revenues do a lot more of the work.
If welfare costs don’t come down and tax revenue doesn’t increase by as much as the chancellor planned then he must either raise taxes, cut public services even further or abandon his deficit target.
Robert Chote’s closing paragraph is worthy of Francis Urquhart:
But uncertainties abound in the underlying forecast, not least the outlook for productivity and real wage growth and its implications for tax revenues. And our forecasts are also based on current policies, while other forecasters might expect those policies to change. Some will look at the public services cuts that remain and ask if they can be delivered. And some will look at the projected savings from welfare, but worry about the Government’s ability to deliver reforms logistically and cuts politically. And if they expect disappointment on either of those fronts, or from the underlying forecast, some may expect the Government to opt for more tax increases or to think again about its goal of sustained budget surpluses. Fortunately, these musings lie beyond our remit.
Some might think that. We couldn’t possibly comment.
There are already signs that the tax revenue forecasts might have been a bit optimistic and I’m still sceptical about the £12 billion welfare cut. It will be interesting to see if that money is still behind the sofa in two month’s time.
“Chote called. Says he might have to repossess the sofa.”