Did you feel it? That moment when George Osborne stopped being the Austerity Chancellor? It happened not soon after he rose to the despatch box to deliver his latest Autumn Statement at 12:30 on Wednesday 25th November. He stood up with a reputation for severity; he sat down a softie.
Okay, perhaps that overstates it. Osborne is still cutting spending over this Parliament – by quite significant amounts – and is reducing the deficit as he does so. But the depth of the cuts has been lessened. Some of them have been abandoned altogether. Remember the £4.4 billion cut to tax credits that was announced in the July Budget and criticised ever since? That’s simply not happening any more.
In this, the Chancellor has been aided by the independent body he established to provide the Government with economic and fiscal forecasts. This Office for Budget Responsibility discovered, in advance of the Autumn Statement, that some of their previous forecasts had been wide of the mark. The state would take in more tax than they had previously assumed, and pay out less in debt interest. The public finances are in a better shape for it.
This discovery immediately improved the OBR’s forecasts for the next five years by £27 billion. I repeat: £27 billion. That’s how much more money there is on the Exchequer’s bottom line than was previously expected. Talk about a Christmas bonus!
Except, like so many of us, Osborne has already spent most his bonus early. He spent it on reversing those cuts to tax credits. He spent it on reducing the cuts faced by government departments. He spent it on a dozen other things, including a permanent fund for filling in the potholes on British roads. In fact, according to the OBR, the Autumn Statement saw a net spend of about £18.7 billion over the next five years. That means there’s only £8.3 billion of the £27 billion left.
This is a remarkable change in Osborne’s approach to fiscal management. At the beginning of the last Parliament, he hoped to reduce the deficit to naught before last May’s election. As we know, this didn’t happen – but it wasn’t for want of trying. The Chancellor stuck rigidly to his original spending cuts; it’s just that weak economic growth reduced the amount he received in tax revenue.
Yet now, at the beginning of this Parliament, he gets a chance to reduce the deficit by £27 billion in one go – and what does he do? He doesn’t take it, at least not completely. Instead, he diminishes his original spending cuts and lets the deficit wait. Austerity is no longer Osborne’s sole lodestar.
At which point, we collide with the question: why? There will be many reasons, although just three that I’d like to consider now. Two of these are more economic. The third is more political.
The first of the economic reasons again relates to the experience of the last Parliament. Back then, a lot of dire warnings were made – including by Osborne himself – about what would happen if the Government missed its fiscal targets. Britain would lose its triple-A credit rating, they said; investors would flee; interest rates would soar. But then the Government did miss its fiscal targets. Britain did lose its triple-A credit rating. And… well, nothing much else happened. The British economy was still regarded as a pretty safe haven in a turbulent world. The Chancellor could relax.
The second economic reason is one that we’ve described before. It was also during the last Parliament that Osborne decided he quite liked one form of public spending in particular: infrastructure spending. He relaxed his previous constraints, and poured £billions into various construction projects, including a £15 billion scheme for renovating the country’s road network. These projects will continue into this Parliament, as will the spending behind them. The Chancellor went out of his way to emphasise the capital investment present in his Autumn Statement.
And the political reason? With Labour struggling and convulsing under the leadership of Jeremy Corbyn, Osborne must reckon that he can relax his deficit reduction plans without much fear of a backlash from the public. Those voters who want the deficit to be reduced faster are hardly going to turn to Labour. And – who knows? – those voters who thought the previous plan was too harsh might just turn to the Conservatives now. The Chancellor is trying to colonise the centre ground.
Perhaps this also explains why there were dashes of Labour elsewhere in the Autumn Statement. The 0.5 per cent ‘Apprenticeship Levy’ on certain companies’ payrolls was the sort of policy that Ed Miliband might have implemented, were it not for his defeat in the general election. Postponing the removal of the 3 per cent surcharge on diesel company cars, from 2016 until 2021, was straight out of Gordon Brown’s playbook.
Indeed, for a Conservative Chancellor, and one who has previously said that he doesn’t want to raise taxes, this was a tax-heavy Statement. To mitigate all that extra spending he’s doing, Osborne introduced policies that will raise his tax take by £20 billion over the next five years.
All of which makes this Autumn Statement something of a landmark: it’s the moment when, to some extent, George Osborne changed tack. Is his new course better or worse? The next five years will be the proving of it. Let’s all hope that another recession doesn’t blow in during that time to ruin everything.