Yesterday, what was left of the government’s deficit reduction plan moved even further into the realms of fantasy.
In its latest Economic and fiscal outlook, the Office for Budget Responsibility reduced its forecast for tax receipts over the rest of the decade.
[T]his year has seen a sharp fall in the amount of tax raised for every pound of measured economic activity. As a result, despite strong economic growth, the budget deficit is expected to fall by only £6.3 billion this year to £91.3 billion, around half the decline we expected in March. That would be the second smallest year-on-year reduction since its peak in 2009-10, despite this being the strongest year for GDP growth.
[O]ur forecast for public sector current receipts is lower across the forecast period compared with March. Receipts are £7.0 billion lower in 2014-15 and £25.1 billion lower in 2018-19.
The key reasons for the deterioration in the underlying forecast are:
- income tax and NICs, where lower earnings more than outweigh higher employment growth to reduce receipts. Lower interest rates through the forecast also reduce tax on savings income;
- VAT receipts, where weaker consumer spending and steeper falls in government procurement associated with implied falls in DEL spending reduce growth in the tax base;
- UK oil and gas revenues, which are lower due to lower oil and gas prices;
- tobacco receipts, which have been lower-than-expected this year and we have assumed a steeper fall in clearances over the forecast period;
- capital gains tax receipts, which are expected to be lower due to lower equity prices; and
- interest and dividend receipts, due to lower interest rates reducing returns on the government’s stock of financial assets.
The result is that the outlook for public finances has worsened. Add in the government’s plans to reduce public spending and things start to look very bad for public services.
The problem is that some services are ring-fenced – health, education, social care for example – meaning increasingly less is available for others, but there is no strategy for closing services down. So deficit reduction would have to go out of the window.
But this is only because George Osborne’s plan has been such a dismal failure. Vox Political has said it many times: You can’t build economic growth by cutting the amount of money available. And it doesn’t take an economics degree to prove that this is a stupid idea from the start.
It was Osborne’s only idea.
He never really wanted to cut the deficit; he only ever wanted to cut the state. Cutting the deficit was an excuse he found he could use easily to distract voters who were gullible enough to believe him. If that was you, try not to be offended at this blog for saying it – be angry at Osborne for exploiting you.
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