Bill Jamieson: Osborne raiding a future piggybank

George Osbornes figures are predicated on new forecasts but forecasts are notoriously unreliable. Picture: TSPL

There’s nothing quite like setting out to sea on a leaky raft, with a dodgy compass and a handkerchief for a sail. But then Chancellor George Osborne is far from unique. It is what all chancellors do. They are the master mariners of hope.

Most make it out of the harbour without hitting the pier. And Osborne was applauded yesterday for veering away from cuts to tax credits and the budget for policing.

But not long into the open sea, a ghostly apparition will drift into view: the first spectral wreck of previous voyages to the Land of Budget Balance.

Even in the face of such warnings from the past, yesterday’s Autumn Statement and Spending Review takes big risks. It is chronically dependent on a set of economic forecasts and government budget projections coming right.

This latest set of calculations is going some. The view current until yesterday was that we needed £20 billion of spending cuts over the next five years.

Now that figure has been cut to just £12bn. And a £47bn increase in tax revenue has popped up that was not apparent to the Office of Budget Responsibility (OBR) just five months ago.

How can we have both a rising level of government spending and a budget deficit vanishing to nothing?

More money for health and education but no tax increases? Cuts in tax credits and police budgets proclaimed as vital but now deemed no longer necessary?

What magic alchemy has so transformed our fortunes?

Step forward the chancellor’s friend and that ever reliable chief navigator for long and hazardous journeys: the economic forecaster.

And not just the dismal forecaster of old.

This five-year plan rests, not on the hesitant and doubting OBR of just a few months ago, but an altogether more upbeat and jaunty OBR: where before it saw only mist and drizzle, it now sees blue skies and sunshine.

It has gifted George Osborne a miraculous lifeline: higher income tax receipts than previously thought – rising from £187bn this year to £233.5bn in 2020-21; National Insurance up from £127bn to £153bn over the same period; higher VAT receipts, up from £120bn to £142bn; higher corporation tax, higher council tax and a golden cascade from stamp duty land tax – up from £12.9bn to £17.8bn.

And for good measure it threw in a fractional increase in its economic growth projections for 2016 and 2017.

Little wonder this Spending Review seemed like a giveaway budget. It’s all down to projections. And who can blame him for not taking advantage of this change in mood at the Happy Navigator?

Is this too sceptical a summary of the lengthy, good news speech in the Commons yesterday? And did it not rest on a voluminous 146-page Spending Review compendium of goodies that would have exhausted a giveaway Labour chancellor?

Let’s just recall the fate of previous chancellors who set sail to the Land of Balanced Budgets: Alistair Darling, Gordon Brown, Kenneth Clarke, John Major, Nigel Lawson, Geoffrey Howe and Denis Healey.

The Budget Red Book of each one projected, without exception, progress towards budget deficit reduction on a five-year horizon. And the calculus of each one rested on a resolute confidence that these projections would come right and that economic growth, tax revenues and government expenditure would behave according to plan.

Indeed, if we were to tot up all those five-year projections of progress towards a disappearing budget deficit and a reducing pile of government debt, we would be living by now in a paradise of budget surplus, stretched out under a blue sky free of debt and marvelling at the low hanging fruit of our good fortune.

Wake me up when we arrive at this Valhalla. I want to be the first to know.

What Osborne has done is not just to take for granted that these latest OBR forecasts are more accurate than the ones he embraced without hesitation in July, but to spend the extra tax projections that have so suddenly and miraculously appeared. In this, it goes one better than the Liam Byrne billet-doux – “all the money’s gone”. Now the money that doesn’t yet exist has also gone.

So big questions still abound on how this Spending Review will fare against the realities of the next few years.

Helpful trends there certainly are, as in debt interest reduction from previous forecasts, helped by slowing global growth keeping interest rates lower for longer. But debt interest is still reckoned to suck out £275bn from the government coffers between 2015-16 and 2020-21. That exactly matches central government spending on local authorities (£275bn) over this period and is perilously close to the £302bn spend on education. There is a pronounced swing towards capital and infrastructure projects. And the extra spending for health, especially mental health, and education strike a popular chord. But the Autumn Statement is not without pain: large businesses will have to find £3bn for the new apprenticeship levy while second home owners and buy-to-let developers will face extra stamp duty.

Government departments, meanwhile, are in for a torrid time: day-to-day spending in the Department of Transport will be cut by 37 per cent; the Department of Energy budget by 22 per cent; the Environment Department by 15 per cent; Business Innovation and Skills by 17 per cent.

What will it mean for Scotland beyond the pledge to protect the Block Grant? The SNP finance minister John Swinney had good reason to listen carefully to yesterday’s statement: he will be presenting the Scottish Budget on 16 December, less than a month away.

All the focus has been on “more powers” – with the happy assumption that, rather than “Tory style austerity cuts”, higher taxes will get Holyrood out of a hole. But the new Smith powers have still to be ratified by Parliament and it will not be until 2017-18 that Holyrood will have the power to raise the higher rate of tax without having to raise other rates.

Even then there’s the problem of behavioural response – how taxpayers react to higher taxes can significantly reduce the proceeds.

The new land and buildings transaction tax showed an 18 per cent shortfall in revenue on residential properties compared to what Swinney projected it would make. And introducing a higher 50p tax rate for well-off taxpayers would be vulnerable to migration and other changes to mitigate the rise.

Central to Swinney’s planning will be the Scottish Fiscal Commission – our own Office for Budget Responsibility. Under legislation before Holyrood, this will be an independent watchdog checking on economic forecasts and the administration’s tax and revenue projections.

He can’t count on a set of projections as benign as those delivered to George Osborne – or that they will be any more accurate. The cruel truth remains that controlling spending, borrowing and debt remain a tough responsibility of steering government through uncertain waters ahead. See the wrecks of previous chancellors. Fair weather forecasts alone can’t be counted on.