Four months ago, there was much cheering and dancing on George Osborne’s political grave (or at least his political cold-storage) as he announced the government’s abandonment of his deficit target and his own resignation.
— John McDonnell MP (@johnmcdonnellMP) July 1, 2016
Today Osborne has bowed to Labour pressure by scrapping his failed spending target https://t.co/Y1PsN63vya
— Jeremy Corbyn MP (@jeremycorbyn) July 1, 2016
Even the Daily Mail said that the government would “abandon George Osborne’s austerity agenda.”
The line was repeated by excited people in my Twitter timeline. George has abandoned the deficit target so it’s the end of austerity. Game over!
If anyone still believed that, the Autumn Statement should have put them right. The OBR’s fiscal outlook report shows that, when it comes to public service spending, very little has changed. The forecast looks pretty much as it did in March of this year, only with the fall in per capita day-to-day public service spending now continuing into the next decade.
With NHS, schools and defence budgets protected, to an extent, this means an ever tighter squeeze on everything else. The cost of the Brexit process, including thousands of extra civil servants, will also have to be found from this shrinking pot.
No, the reason for the abandonment of the government’s target is not an end to austerity it’s simply that, even with continuing public service and welfare cuts, the public finances are now in such a dire state that eliminating the deficit by the end of the decade is now all but impossible. Lower economic growth means lower tax receipts. Even without the modest increases in capital spending, weaker growth meant that the government was already on course to miss its target.
Chart by Ben Chu based on OBR figures.
This forecast assumes that the government is able to achieve all its proposed cuts to public spending and social security. This is unlikely to be any easier than it looked this time last year so even the new deficit target might prove to be a tall order.
In any case, the Brexit vote has made economic forecasting even more difficult than usual. It has turbocharged Robert Chote’s donkey. The OBR has based its projections on the UK leaving the EU in April 2019, in line with the prime minister’s statement but even then, there are so many possible variations on the terms of exit, it is very hard to predict what the economic impact might be.
What we can be reasonably sure of, though, is that Brexit will not improve the economy in the short run, which means that cuts to public service spending will continue for the rest of the decade. Much about the next few years is uncertain but, whatever else happens, austerity will be with us for some time yet.