Coffee House

Osborne accidentally makes the case for more savings

21 February 2012

Rhetoric aside, what’s the difference between left and right in British politics? You won’t catch either party quantifying it, because the answer embarrasses both. The ever-cautious
George Osborne is cutting just 0.6 percentage points a year more from government departments than Labour planned to (see table, above). The great joke is that the difference between the two parties
is actually within the margin of error. Government is a gargantuan machine that just can’t be controlled to that degree of precision: a billion quid is, to Whitehall, a rounding error.
Today’s public finances have demonstrated that. The UK government had actually intended to borrow around £102 billion at this stage in the financial year, and instead it has borrowed
£93 billion. This is due to less spending, rather than more tax receipts. So Osborne has, in theory, £9 billion extra to play with in next month’s Budget. He’s also paying far
less on debt interest than he would have were it not for QE (which artificially lowers the rate at which government borrows). In the past, Osborne has cheekily taken low UK gilt yields as proof
that the markets back him: I hope he doesn’t this time. It’s proof that, if the Treasury-owned Bank of England buys hundreds of billions of Treasury debt, the price will be tilted
downwards. (I suspect you won’t see many Treasury-backed studies looking at what the government’s borrowing rates would be if it wasn’t for QE, and the fact that so many UK banks are obliged by the
government to buy its debt, thus further robbing pension funds).
But if today’s public finance figures show anything, it’s the capacity for far more savings to be made by the government machine. It is spending £9 billion less, without even meaning to.
Imagine how much more savings could be found if the government were to deliberately try to save more — and use the money cut taxes and get the economy growing again.

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Show comments
  • Julian F

    (continuation of previous post – the site won’t allow me to post large amounts of text)…If markets did not support current policy, we would soon know about it and no amount of government intervention would disguise the fact – witness sterling’s ejection from the ERM. I just think you need to be a little more nuanced in your analysis.

  • Julian F

    Fraser at 6.12pm on 21st Feb – you are right that it is difficult to assess the impact of QE. In fact, as a form of money-printing, one would expect attendant inflation expectations to be priced into long yields (pushing them up). But the curve has flattened in recent years, despite Bank purchases being concentrated at the short end of the market (pushing short yields down as a first-round effect). So your oft-repeated line that the gilts market is simply being distorted rather than signalling approval of government policy is not well supported by the evidence.

  • AR

    @PatrickOsgood / Alan Davis

    Fraser’s figures are compound reductions (and by whatever quirk, also the simple average reduction).

    For those interested, the compound reduction s over the period are: Darling (-10.3%) / Osborne (-13.2%)

  • Chris Ward

    Your table (therefore your post) is rubbish. By simply averaging the 5 years you’re not allowing a higher weighting for the reductions in the earlier years. Try redoing it using net present value or, better still, future value at the end of the 5-year period. Then you’ll see a bigger difference.

  • Dimoto

    Fraser Nelson is the most boring, repetitive and pointless blog-poster on here.

    He should get a room with Heartless Curmudgeon and David Lindsay.

  • Fraser Nelson

    Julian F, I’m not saying that QE was the only factor cutting UK interest rates. My point is that the effects of QE are very under-explored: the pensions industry calculates that it means £150b off the national pension pot, for example. How much did it save the gvt by lowering yields? Saying yields ended up back where they started is not quite the same as a full impact assessment report. I doubt that Chote’s OBR will be doing such calculations, or HMT, which is a shame. There is a consensus behind QE, which under the UK political system tends to mean lack of scrutiny and big mistakes made.

  • Julian F

    Between May 2010 (end of QE1) and October 2011 (beginning of QE2), long yields fell by nearly 100bp. As the Bank wasn’t buying in that period, QE was not the primary cause of this reduction in yields. Your analysis is too simplistic Fraser.

  • Julian F

    I suspect you won’t see many Treasury-backed studies looking at what the government’s borrowing rates would be if it wasn’t for QE.

    You might want to refer to the Bank’s Working Paper 393 – “The financial market impact of quantitative easing”. One quote about the effect on yields – admittedly out of context: “But comparing their levels at the end of May 2010 to where they were before the start of QE in February 2009 suggests little overall change at most maturities.” So there!

  • Julian F

    Fraser, I think you mean yields would “tilted downwards”, not prices. The two are inversely related.

  • mongoose

    Embarrassing for you, Mr Osgood. Those calculations are correct.

  • David L

    Fraser, er, yeah; but Darling didn’t actually have to deliver his cuts. Osborne, so far, has delivered.

  • Alan Davis

    Patrick, “cumulative” means the sum of the changes over the various years. Nelson wasn’t referring to this, but the average change, per year (that’s what the table shows). Definition of “cumulative change” here

    And “average” here:-

  • Hexhamgeezer

    Have the Treasury done any estimates for the inevitable increase in benefit, housing, education and health costs for people with surnames ending with ‘opolous’ that we will soon be paying?

  • justathought

    A lot more progress could have been made if we got to grips with immigration. Net immigration running at over 200,000 far exceeds the number of new jobs being created in the economy. As the research has shown many of them then ‘migrate’ onto welfare benefits.

  • Dan Grover

    There are also the facts that you can provide tax breaks in ways that aren’t simply raising the income tax threshold or lowering the tax percentage. You can apply a massive decrease in business side national insurance for new hires – this has the virtue of only benefitting businesses that are hiring, whilst also not offering them the option of much saving (only those that were going to hire anyway – but growing businesses that are hiring shoring up their books isn’t necessarily a bad thing in the mid-to-long term either).

  • Dan Grover

    Neil Wilson, whilst it’s true that tax breaks cannot be trusted to be spent at least once, they do at the very least have the benefit of not distorting the market. This may seem like an acceptable bi-product of the increased spending from governments, but that’s really only the case in the short term. We can chase next quarters GDP figures as long as we want, but it’s really only by letting the private sector grow in a sustainable way (that will continue to grow without public spending, unlike many publically funded projects) that we can ensure long term growth. If that comes at the expense of short term growth then, in my view, that’s an acceptable albeit unfortunate problem.

  • Dan Grover

    Ah, Ok Rhoda, my mistake. In his defense, this is not the first time he’s put forward this argument.

  • TrevorsDen

    Mr Nelson youir graph says its comparing Darlings 201 estimated with Osborne’s 2011 actuals, ie revised to allow to allow for the Eurozone crisis. There is no evidence to suggest that had Darling followed his plan that he would not have had to revise it the same way that Osborne did.
    Darling would not have been Chancellor of course if Brown had gained a majority; quite just what kind of a mess we would be in now had he won and Balls was Chancellor is hard to judge.

  • Rhoda Klapp

    Sorrym Dan, I was trying in my inarticulate way to point out that, as usual, you could have read that below the line years ago. That he is telling the commenters what he knows they already know. As if it is a discovery.

  • ButcombeMan

    All true Fraser but Labour has been better at creating the memes: “Cutting too far and too fast” for example.

    Labour government was all about spin and presentation with little real good governance. Arguably the coalition is a little better at good governance with presentation of policy and explaining the choices, being terrible. Example: Lansley/NHS. Example: May and splitting UKBA.

  • Fraser Nelson

    Kingstonian, Osborne’s five-year spending plan was published in his first Budget, which came only a few months after Darling’s.

  • Dan Grover

    Rhoda, isn’t that precisely what Fraser is saying here? You’re asking him why he is finding it harder to do something he isn’t doing.

  • IanH

    Fraser, stop banging on about the difference between Darling’s budget and the current one. Liebour would not stick to that budget so it’s a useless comparison, as is relating the fact that Osborne is having to borrow more than expected. If you recall Gordon had saved the world back then, and the nervousness introduced by a Euro collapse came later.

  • Neil Wilson

    Let’s see

    The government spending £9bn in the economy and cutting taxes by £9bn amounts to the same thing in aggregate – except that the government can guarantee that the £9bn will be spent at least once.

    Not so with tax cuts which will go to savings according to the propensity to save of the target of those cuts.

    You’ve got to have real faith in multiplier differentials to get around that.

  • Peter Herd

    Yes Labour would and sell their souls to get power

  • Sheumais

    The answer, Telemachus, is they already have, by squandering so much money across the board, there is no way the country could afford to maintain the level of spending. They have even, rather gracelessly, admitted that, but proposing the cuts detailed above. I wonder who they would have tried to blame for the mess if they’d been forced to implement the cuts? Probably Margaret Thatcher.

  • Rhoda Klapp

    Fraser, you oughta read the comments more often. You would find that many of us have known for years that they are all the same, that policy persists even as parties swap places. I understand that it is your job to make the distinctions, false though they may be. Are you not finding it a lot harder nowadays?

  • Dan Grover

    £9bn is about £150 for every man, woman and child in the UK. So that’s about £200 for every adult. How about a parachute drop?!

  • Kingstonian

    I have lost count of the number of CH Posts who have pointed out the sheer idiocy of comparing Darling’s two year old fantasy projections with Osborne’s up to date actuals. Yet Fraser treats us to one more round of this lunacy.

  • Heartless Curmudgeon

    The word “joke” will suffice Fraser: for everything and everyone, from the H2B downwards, with the exception of the few honourable people trying to do an honest job.

  • Patrick Osgood (@PatrickOsgood)

    Fraser Nelson can’t do cumulative change. Yet another failure of basic arithmetic. Embarrassing.

  • telemachus’

    There may be no differences that matter on the fiscal arrangements but it is what they do within the limited spending capacity that they have that makes the difference to the wellbeing of our citizens
    Will labour wreck the cherished health service?
    Will labour steal the last remnant of dignity and money from the disabled?
    Will labour jeopardise the security of our citizens by contracting the police?
    Will labour force parents and children screaming into Academies without their consent?
    The fiscal balance tells little.

  • Sheumais

    I am reluctant to suggest any political achievement by Osborne, but maybe he’s playing a very sound game here, establishing with the public that cuts are required, resulting in the concession from his external opposition, Labour. If he can now show billions can be saved with little effort, he has the perfect platform from which to announce deeper cuts. Labour can squeal all it likes, but it’s more likely the more damaging opposition will come from within the coalition, with more nonsense about taxing the rich.

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