Britain faces a cocktail of economic risks.
Such has been George Osborne’s persistent message since the start of 2016. He talked about the slowdown in China. He fretted about the turmoil in financial markets. He warned that growth was still weak in the eurozone. What probably never crossed the chancellor’s mind was that speculation over his own future might be part of the mix.
There is no getting away from the fact that the budget and its aftermath have been a political and personal disaster for Osborne. Even while he was speaking, it was clear that the package would quickly fall to pieces. The budget could only make the sums add up through blatant accounting tricks. It announced tax cuts at the same time as it cut estimates for Britain’s long-term growth potential. Even worse, it provided tax breaks for the better off at the same time as it targeted the disabled.
The idea appears to have been to kick the can down the road until after the EU referendum on 23 June in the hope that the economic outlook will improve. Hence the pre-announced climbdown on reform of pension tax relief and the sop to the motoring lobby in the form of yet another freeze on excise duties for petrol and diesel.
Iain Duncan Smith’s resignation, followed by his equally dramatic appearance on the Andrew Marr Show, has left the idea of a three-month holding operation dead in the water. Osborne has been forced to retreat on the disability benefit cuts, he has been accused by Duncan Smith of a “deeply unfair” budget, his accounting devices are seen as a bit rum even by his own fiscal watchdog, the Office for Budget Responsibility (OBR), and there is now talk of him being moved to the Foreign Office in a post-referendum reshuffle. This is not simply a reprise of the pasty tax furore in the omnishambles budget of 2012 – it is far more serious.
One reason is that IDS’s main charge is correct. Osborne has made a fetish out of running a budget surplus by 2019-20, something for which there is no obvious economic rationale. He is seeking to do this whilst simultaneously reducing corporation tax, freezing excise duties on fuel, offering tax breaks to North Sea operators, and meeting Conservative manifesto pledges to increase the income tax personal allowance and the threshold at which people starting paying income tax at 40%.
This is supposed to be achieved by a fresh onslaught against tax avoidance, an intensification of the squeeze on the running costs of Whitehall departments, and by taking the axe to the welfare bill.
Because large chunks of public spending – the NHS, schools and overseas aid – are protected by a ring fence, that has left other government departments facing real inflation-adjusted cumulative cuts in their budgets between 2010-20 of a third or more.
The cuts to the Ministry of Justice, the Home Office and other unprotected departments would need to be even bigger were it not for the planned £12bn reductions in welfare spending. But payments to pensioners account for around half the welfare bill and these too are ringfenced. Osborne’s planned cuts amount to around 10% of the non-protected welfare bill and this cannot be done simply by removing benefits from those deemed by the chancellor to be feckless and workshy. It has not been possible for the Treasury to make the savings without targeting money spent helping the disabled.
Osborne has now been ensnared by the political trap he imagined he was setting for others. He set himself the target of running a budget surplus because he thought it would entrench Labour’s reputation as the party of deficit deniers, and he imposed a tough welfare cap to show that he supported the “strivers” while the opposition supported “shirkers”. Pensioners were exempted from any cuts because they are more likely to vote Conservative than any other demographic group.
Shares in Osborne peaked at the time of last summer’s post-election budget but have been falling ever since. There was a brief period between early 2013 and 2015 when the economy appeared to be shaking off its post-Great Recession blues. Growth picked up, consumers had more money in their pockets and investment started to revive.
Over the last few months it has become clear that this was a false dawn. Earnings growth remains stuck at around 2% and living standards are only rising because inflation is so weak. Growth is concentrated in the services sector, leaving the economy unbalanced. Most worryingly of all, Britain’s productivity record remains wretched, which is why the OBR has cut its estimate of the economy’s long-term growth potential.
Osborne is not, of course, the first chancellor to find that solving Britain’s structural weaknesses is a lot harder than it looks. Up until the budget, he could comfort himself in the knowledge that the economy was growing, per capita incomes were rising and that opinion polls suggested that voters were not clamouring for a change of government.
Today the chancellor is a diminished figure. He has been damaged by the back-tracking on tax credits, pensions and now disability benefits. He continues to miss all his targets for deficit reduction. He has political plans to dish his opponents but no economic strategy worthy of the name. His fiscal jiggery-pokery has been fully exposed.
Osborne’s weakness presents a big problem for David Cameron. The prime minister knows that winning the referendum is not going to be easy. His pitch to voters is that Brexit is a leap into the economic unknown that is simply not worth the risk.
Even the most passionate Brexit supporters admit that there would be short-term costs from leaving the EU. The pound would fall, shares would take a hammering, investment plans would be mothballed. What the “leavers” say, though, is that these are outweighed by the long-term advantages, and that making a decision on what might happen in the first two years after a leave vote would be like predicting the result of a football match after only 15 minutes had been played.
The chancellor will play a pivotal role in the campaign. It is important for Cameron that Osborne is seen as believable. If the chancellor is not seen as credible on deficit reduction or the economy, then the danger is that he won’t be seen as credible on the dangers of leaving the EU, either.
Labour agrees with IDS about the unfairness of the budget. Indeed, that was precisely the point Jeremy Corbyn made when responding to Osborne last Wednesday.
Given that the Conservative party is poised for its biggest schism since the repeal of the Corn Laws in 1846, Cameron will need the support of the opposition leader and the votes of Labour supporters if he is to win the referendum. It is not obvious how Osborne’s ideological and botched budget will help to secure them.
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