Osborne’s Budget Is An Admission of Policy Failure

.600ZOsborne’s Budget Is An Admission of Policy Failure

Michael Burke

Adopting a ‘Budget for Growth’ now is really a tacit admission of failure by the Tory-led coalition. The economy was already growing when they took office. Because of that, two key indicators were falling- unemployment and the deficit.

Now, there is renewed economic weakness. The ‘independent’ Office for Budget Responsibility has continued to cut its forecasts for growth as a result of government policy. In its June 2010 forecasts the OBR projected 2.3% growth this year. That was cut to 2.2% in November and has now been cut again – to just 1.7%. The trend is down because of government economic policy- nothing else; the world economy is performing at least as strongly as the OBR forecast. Despite George Osborne’s claims in the Commons, future British economic growth has also been downgraded, from 2.8% in 2012 to 2.6% and now just 2.5%. This is exceptionally weak growth coming out of a severe recession.

Because of government spending cuts the economy was sent into a tail-spin in final quarter of 2010. This resumed contraction in the economy has inevitably also led to a reversal of the favourable trends in those two indicators. Unemployment is rising once more and the latest data on public finances shows that the year-long downtrend in the deficit has gone into reverse.

Unemployment & the Deficit

The OBR’s forecasts for unemployment have also risen, so unemployment in 2011 and 2012 was originally 8% and 7.6%. Now these have risen to 8.2% and 8.1%. Similarly, deficit forecasts have also risen under the impact of slower growth. Initially OBR had projected a public sector net borrowing requirement of 7.5% and 5.5% of GDP in the next Financial Year (FY) and in FY2011/12. Now these have risen to 7.9% and 6.2%.

This gives the lie to the central claim of government policy – that all these cuts are necessary to reduce the public sector deficit. Their policies have led to a renewed widening of the deficit.


None of this is to say that the OBR is a truly independent body, as it uses the Treasury economic model or to endorse its forecasts. In fact, its forecasting record is poor. First it underestimated the growth of the economy arising from the increase in government spending under Labour, and pushed up its growth forecast by 0.6% for 2010 in November. Then, repeating the same error, it underestimated the negative impact on growth arising the Tory-led coalition’s cuts, and slashed its estimate of 2010 growth back to 1.3%.

Even now, the OBR is on the optimistic side of growth projections. As David Blanchflower has pointed out the OECD forecasts lower growth than the OBR’s 1.7% and 2.5% in 2012, projection instead 1.5% an 2%, as does the CBI (1.8% and 2.3%) while the consensus among private forecasters is 1.8% and 2.1%. Yet the OBR’s forecasts would still make this the weakest recovery from recession since the 1930s.

Budget Measures

The Budget does nothing to alter the negative economic effects of government policy. Osborne described it as ‘fiscally neutral’, that is will have no net impact on the level of government spending or revenue on the economy . This means going ahead with plans for massive spending cuts and tax increases beginning in April that were announced last June and last October in the Budget and the Comprehensive Spending Review.

The downturn was caused by the government’s decision to withdraw £9.4bn from the economy in the financial year just about to end. But its plans to withdraw a further £41bn from the economy this year through spending cuts and tax increases on middle income earners and the poor are unchanged.

This is equivalent to 2.7% of GDP, and requires heroic assumptions about the willingness of the private sector to make up that shortfall. In fact, as the recent survey from the Institute for Chartered Accountants in England and Wales makes clear, the private sector is struggling under the weight of government cuts, with nearly half of firms (47%) reporting lay-offs as a result.

  • Taxation. The government is cutting corporation taxes and other taxes on businesses. It seems to believe low taxes necessarily attract businesses. That is incorrect, and can in fact store up serious imbalances in the economy. Iceland and Ireland have the lowest taxes in the OECD – and are not an advert for low taxes! Germany has the highest corporate tax rate in the EU – and Europe’s most successful economy. But what the tax cuts do show is that we aren’t all in this together – tax cuts for the wealthy while the poor and middle incomes are clobbered. It also means tax revenues are lowered.
  • Deregulation. The likelihood is we will only see the full economic picture as supplementary Budget docs are released, but lightening anti-money laundering rules is not a good start. Enterprise Zones were tried and failed under Mrs Thatcher- they simply tend to shift jobs from one location to another at significant cost to the Treasury.
  • Education The Chancellor trumpeted support for university technical colleges and apprenticeship schemes. But this is the government which has trebled higher education fees and abolished EMA which will be hugely damaging to the requirement to create a highly educated workforce.
  • Pensions. But the elderly will also suffer. Osborne announced his intention to continuously push the retirement age higher, meaning that some young people yet to enter the workforce may never achieve a decent retirement, especially as pension contributions are set to rise by 3% and there is the threat to implement the Hutton Review into pensions, meaning lower pensions, higher contributions and many pushed out of public sector schemes altogether.
  • Tax Avoidance. Osborne introduced measures he said would yield £1bn in closing tax loopholes and avoidance of a total of £14bn, yet the HMRC has previously said the total ‘tax gap’ of uncollected taxes was £42bn in the last FY . But even this miserably small effort is a tribute to the campaigning efforts of those in ukuncut and false economy who have done been highlighting Britain’s biggest tax dodgers and campaigning against them.
  • Fuel stabiliser. Taxes have been increased on oil & gas companies to pay for a cut in the fuel duty stabiliser and fuel duty. But the Tory-led coalition’s increase in VAT raised the price of fuel at the petrol pump by a far greater amount than these cuts, a 3p rise versus a 1p cut. This is a typical Tory con, well practised by Tory Mayor Boris Johnson in London where a freeze in the Council Tax is more than offset by soaring fares.
  • Raising the Personal Allowance. Raising the personal allowance before income tax paid to £8,015 per annum is billed as a measure to benefit the poor. But this is untrue. The very poorest, including students, the retired, the unemployed and many part-time workers don’t earn enough to get caught in the tax threshold. The real beneficiaries are much higher earners, who enjoy the full benefit of the allowance until they reach the higher earnings’ tax rate.
  • Green Investment Bank (GIB). It’s welcome that that the funding for the GIB is being increased to £3bn – after the widespread criticism that the original £1bn was pathetically small. But even the new amount is wholly inadequate to the pressing task of carbon-emission reduction and will not be lending to any projects before 2015. It is as if Osborne is determined that no government investment at all take place which might soften the blows he is inflicting on middle-income earners and the poor.


The alternative should be clear, and it cannot be slower, shallower, more anguished cuts that many on the Labour front benches still favour. In fact the thankfully unimplemented March 2010 Budget authored by Alistair Darling and Peter Mandelson would have imposed £26bn in spending cuts and tax increases this year, compared to Osborne’s £41bn – somewhat shallower but nearly treble the fiscal tightening seen to date. If Labour is frightened by the reaction in the financial markets to a pro-growth economic policy, it shouldn’t be. As elsewhere, it is this government’s economically damaging policies which have led Moody’s ratings’ agency to question the sovereign credit rating.

The key to economic recovery remains government investment. Business investment fell by 18.8% in 2009 and accounts for three-quarters of the entire decline in GDP. By contrast, government investment rose by 14.1%, while current spending rising by 1%. It was this that laid the basis for the modest economic recovery in late 2009 through 2010, which led to falling unemployment and a falling deficit. This government has hit the brakes hard on investment in 2010 and now is in reverse, with a 12% fall in government investment planned for this year. Inevitably, this is already producing a renewed rise in unemployment and a renewed rise in the public sector deficit.

Low corporate taxes, deregulation and lower public spending are not even designed to restore economic growth and reduce the deficit. As the Wall Street Journal helpfully points out, their true purpose is the reduction in wages in both the private and public sectors, leading to higher profits . A policy based on restarting growth, reducing unemployment and actually reducing the deficit has to begin with the opposite policy to Osborne – that is it has to support investment, not cuts.