Coffee House

The borrowing behind Osborne’s Budget

25 March 2012

Will George Osborne’s refusal to look again at high levels of state spending become the greatest risk to Britain’s economic stability? There have been plenty of rude comments about the
Chancellor’s supposed tactical ineptitude in the weekend press, but he has still managed to keep on borrowing and have almost no one notice. Osborne’s iron commitment is to spending,
and a programme of cuts which total just under 1 per cent a year. His commitment to deficit reduction is flexible, as his three Budgets have demonstrated:

Osborne spent the election campaign berating Labour for its lack of ambition in halving the deficit in four years. He’s now doing it in five, but no one points this out. Quite a result. And,
yes, Gordon Brown may also have done the same in the face of the slowdown — but Brown would have been lambasted by the opposition for breaking his promise. Osborne has not just got away with
it, but is being congratulated for sticking to a plan he abandoned long ago. He has brilliantly outmaneuvered Ed Balls, whose ridiculous ‘harsh, deep cuts’ attack line has rendered him
mute on real story: that Osborne’s proposed savings are not ambitious enough, and may yet cost Britain its AAA rating.

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I’ll leave CoffeeHousers with this graph from Citi. It shows Britain’s projected debt increase, and compares it to that of countries with AAA rating. It suggests that there may be
trouble ahead.

Right now, Osborne can borrow so cheaply because of QE: he has the Bank of England buying up a quarter of all government debt with freshly-minted cash from Sir Mervyn’s Magic Money Machine.
But this can’t last forever. I argue in my Telegraph column that another spending review is needed. Osborne said in the Budget speech that his first commitment is to ‘stability’.
The high spending he inherited may soon become the no.1 threat to that stability.

A P.S. for the small print:
In office, Osborne has used a specific (narrower) definition of the deficit: the cyclically-adjusted deficit which his 2010 Budget showed would be eliminated in
the financial year 2014-15. His decision to borrow more, in response to the slowdown, has added another two years to the timetable. So a cyclical surplus is now expected in 2016-17. See Table C1
here, and Table 1.2 here, for comparison. There are, as yet, no plans for elimination of the unadjusted deficit.

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Show comments
  • Mark M

    TrevorsDen – those ‘cuts’ are reductions in future budgets. It seems to be that if I have a department with a current budget of £75bn, and previously the plan was to increase that to £100bn in 4 years time, if the government decides to freeze my budget at £75bn for the next four years I am suffering a 25% ‘cut’.

    Nearly all these cuts you read about are simply increases in spending that are no longer happening – not really cuts at all.

  • Dimoto

    You really can’t understand why things are trickier than planned ?

    It’s the lunatic, suicidal, Franco-German hegemony project over the water !

    Nelson wants Osborne to ape them, by cutting even more. Not sensible nor rational.

    And to pretend that the external environment has not worsened considerably since 2010, is also dishonest.

  • Fraser Nelson

    TrevorsDen, the NHS budget is going up in England, down in Wales, but there’s mayhem in both. I don’t minimse the cuts, I just quantify them: just under 1% a year for total state spending, and about 2.8% a year for departmental budgets (vs 2.3% that Labour had planned). These cuts are real and many of them hurt. But they’re not ambitious enough for a pro-growth strategy to emerge. We ought not to expect much from Osborne’s subsequent budgets for as long as the five-year spending plan remains unadjusted. Nor will the risk of instability go away for as long as Britain remains on a Darling Minus timetable for deficit reduction

  • Archimedes


    You do talk rubbish. It doesn’t matter because the markets have already taken it into account? So, you mean that because we have already paid the price early that it doesn’t matter at all? But, as you say, we’ve already paid a price for it? So, it does matter because we have already paid the price? Is that what you mean? Oh good. I thought you were just being incoherent before.

  • daniel maris

    This graph is a mark of the man’s failure.

    He collapsed demand by introducing a huge job cuts programme in the public sector and had knock on effects on those in the private sector.

    We could have followed that trajectory without half as much economic pain and we would be well on the road to recovery by now. Instead he has fatally weakened demand, without curing our borrowing addiction.

  • TomTom

    TrevorsDen is his usual numskull self – they make “cuts” in projected spending but never in actual spending, so the cuts never transpire. The cost-drivers are not under control – population growth through immigration is a major cost-driver coupled with legal obligations to provide services.

    Every single immigrant that produces a baby generates a spending stream that cannot be capped. Rising population causes rising Spending and therefore Taxes/Borrowing.

  • Paul Danon

    It shouldn’t be possible to revise a target or a prediction. Such prognoses should be kept the same until the deadline is reached. Then would come any necessary explanations of why the goal hasn’t been reached. BTW, have the ratings-agencies been fooled into thinking that the UK really has embraced austerity? You’d think they would see through that.

  • telemachus’

    PS click through Conservative Voices and see that the moderator is crowing about the deception
    Time for deletion?

  • telemachus’

    ‘May yet cost Britain its AAA rating’
    I am always marginally unhappy when sound economic commentators fall for this supposed threat.
    It mattereth not since the market has already discounted this on the ratings agencies threats. And so like France, when it comes it will change nothing.
    Imagine the ammunition it would give to Balls if he were to cut further.

  • Rhoda Klapp

    There is no milege in restraint. There is no political advantage in reducing the debt, and while you have a bank who will print whatever you want in terms of funny money, and lots of mates who can find ways to have it spent to their advantage, why not?

    If this man intended to be a decent chancellor and take proper care if the finances of this country, he has had plenty of time to demonstrate it. Just another useless appendage, or an actual crook? You decide.

  • TrevorsDen

    There was me thinking that there was howling over defence cuts, over 25% cuts in the local authority budget, cuts to education, over hundreds of thousands of lost jobs in local authority and civil service. Then there are cuts to police numbers. 20 billion savings in the NHS causing mayhem.

    But Fraser tells us there are no cuts. Just where does he make cuts because he seems to be saying that the cuts to date are infinitesimal. Will he only be satisfied when we have Greek levels of riots in the streets?

  • Paul Maynard

    This shows at least two things

    1 How useless the media are at dealing with the key issue of debt. They absolutely failed to do whilst Brown was behaving like a drunk in a casino and now they are doing the same. And your numbers do not include PPP and unfunded pensions!

    2 The boy Osbourne will be forced into real draconian spending cuts as we approach the election giving New Liebour and the Lib Dems the opportunity challenge his competence and of course lie like hell.

    The hapless public will not know what hit them as money printing ends and interest rates return to a more normal long term level around 5%.

    In the contest for the worst PM since forever, whilst before it was a equal fight between Bliar and Brown, Cameron is now coming up very fast on the rails.


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