Osborne’s Last Budget: Cut the State, Pump Housing, Win Election? Nah.
The one thing you can say about the 2015 Budget is that it more or less spells out what the Conservative Party is planning to do if it wins the election in May. Cut spending and cut taxes.
We weren’t afforded such luxuries in 2010. Back then, Big Society Tories were all about matching Labour’s spending plans while the LibDems gave voters no clue that they would support austerity so enthusiastically. A coalition programme agreed during the first crisis in Greece justified reductions in government spending not seen for many decades.
This time we know that, if he keeps his job, George Osborne will press ahead with plans to reduce the amount the government spends to the equivalent of about 36% of the economy. He’s not quite taking it back to the 1930s as he had planned in December, but the amount government has to spend will hover around lows last seen in 2000, when Labour was fulfilling its pledge to stick to previous Tory spending plans. On another measure, the amount allocated to government departments will plunge to its lowest since the early 1960s.
departments will have budgets cut by 6%. Not even Greece is doing that
What this abstract 36% equates to is huge cuts in the daily spending on all sorts of government services. Not quite the 60% cuts by 2020 that Osborne promised in December, just cuts closer to 40%. Looking at the Social Security budget just about everything apart from pensions gets squeezed. In the tax years of 2016-17 and 2017-18, government departments will have budgets cut by almost 6%. Not even Greece is doing that.
In reality, Osborne is unlikely to deliver anything like those cuts. We’ve been here before: for all Osborne’s hard-ass act back in 2010, the Coalition hasn't really delivered the austerity it promised, which is just as well because otherwise the economy might still be in recession.
So it’s probably just as likely that, for all the tough talk today, Osborne will change course to suit the prevailing wind and go soft again in the next Parliament. People want nice schools and clean hospitals and, for the most part, quality public services.
families will borrow more than ever on the back of rising house prices
For all the hubris about Britain walking tall again and boasts that the UK will be the richest economy in the world, there was little from Osborne on how so much of this growth is predicated on consumer spending. You can believe that people will spend more because their wages will go up — which has failed to happen for much of the last five years — or you can believe, as did the government’s own watchdog the Office for Budget Responsibility in December, that it’s because families will borrow more ever on the back of rising house prices.
People’s incomes over the last five years have grown on average by a quarter percentage point a year compared with the average rate of 2.25% a year since 1955. The OBR said that debt held by families will be more than 1.7 times their earnings — which is higher than in 2007, the last time the economy had a heart attack.
That seems to be the plan. Keep people borrowing to buy crappy houses; hope that house prices keep rising so that people feel rich and spend money. To that very end, Osborne announced a Help to Buy ISA in which the government will give you £3,000 if you manage to save £12,000 for a deposit. Unless housebuilding matches demand — which it won’t — all that’s likely to do is push prices up further.
A buy to Let, Dear?
That’s small potatoes though. The daddy house price bubble maker, the big bazooka has got to be the measures announced to allow people with pension savings to invest in anything they want (until recently, pensioners were forced to buy an annuity which guarantees income till you die). You can just see this freedom playing out in the living rooms up and down the land: “What shall we do dear, put our life’s savings in tech stocks, perhaps in a fracking company and a bit in gold just in case or shall we go for a buy to let in Lewisham?” Pensions freedom equals housing boom.
That’s the Britain that will walk tall again, where spending and welfare cuts have reduced the income of the poorest fifth of the population by 2.2% percent since 2011. That’s on top of the zero hours contracts, higher fuel prices, crazy rents and everything else. Yes, the top fifth is worse off by 3.3% largely because of more taxes, but that was never going to hurt them quite as much.
Osborne knows on what side his bread is buttered. The Budget is about the election, not the economy. He has created a £20 billion cushion that will allow him to make all sorts of promises going into an election while, at the same time, warning about the dangers of going soft on the deficit. The first will be his excuse to cut taxes and the second his excuse to cut spending, and that’s called politics, not economics.
About the author
Gonzalo is the founder of Disclaimer Magazine and heads up our art features. He has covered politics and economics for almost two decades, including nine years as a reporter for Bloomberg in the House of Commons and, before that, he worked for Dow Jones and The Wall Street Journal. As well as his work at Disclaimer, Gonzalo advises NGOs on communications and policy.
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