How worried is George Osborne? That is the question hovering insistently over this week’s Budget. At the time of last year’s Autumn Statement, as we wrote afterwards, he did a good job of not seeming worried at all. Thanks to the Office for Budget Responsibility revising some of their forecasts, he had an extra £27 billion to play with, and he went about using it to reverse some of his cuts. Austerity, if not entirely done away with, was lessened. The Chancellor had a smile on his face.
But now, just a few wintry months later, the smile has faded. Things look very different. The low price of oil has continued to diminish the Government’s tax revenues, whilst unsettling economies and stock markets around the world. The instability in the Middle East is affecting European countries too. China is slowing down. As Osborne put it himself, in an article for the Sun on Sunday at the weekend, ‘the world [is] facing its most uncertain period since the Great Recession’.
This uncertainty could undermine Osborne’s defining task: deficit reduction. As per the requirements of his ‘fiscal mandate’, he has promised to bring the public finances into surplus by no later than 2019/20. At the moment, the OBR expects him to accomplish this: in the supplementary documentation that it released alongside the Autumn Statement, it forecast a surplus of £10.1 billion in the target year. But, were the economy to suddenly slump, this plan could be thwarted. The tax revenues that the Chancellor relies on would diminish, and the deficit could persist for longer.
Which returns us to our initial question: how worried is George Osborne? A large part of the answer will come in the Budget. If he feels as though his deficit reduction plan is under threat, then he might go back on the relative generosity of November’s Autumn Statement, and introduce a number of public spending cuts and tax hikes to bring the public finances back into line. He appears to be softening us up for this already. In an interview with Andrew Marr on Sunday, he talked of finding additional savings of ‘50p in every £100’.
What would Osborne target? So far as motorists are concerned, the principal fear is that he might start raising fuel duty. This is something that we’ve written about many times before, including here, but with good reason: the economics of fuel have changed, and so could the politics. During the last Parliament, when fuel prices were high, the Chancellor forewent £billions in tax revenue to freeze fuel duty or, on occasion, take a penny off it. But now, with fuel prices as low as they have been for years, he might feel that we can afford the extra burden. He could certainly make use of the extra revenue.
And there’s extra revenue to be squeezed from elsewhere, too. Last year, the former pensions minister Steve Webb warned that the Treasury could try to recoup some of the revenues that they lose from salary sacrifice. It hasn't happened yet. It may never happen. After all, it would take a brave – or should that be ‘desperate’? – Chancellor to upset the many thousands of workers who currently benefit from the happy arrangements of a salary sacrifice scheme. But it is worth keeping an eye out for, not least because the Chancellor, if he does do anything, is unlikely to trumpet it in his speech on Wednesday. If there are some small changes aimed at some schemes, they will probably be mentioned in the fine print of the Budget itself.
There’s little point in speculating about every spending cut and tax hike that Osborne might introduce, not least because he might not introduce them. The Chancellor will be acutely aware of the economic situation and the persistent deficit, but he will also be acutely aware of other forces pulling him in opposite directions. The upcoming EU Referendum pits him, an advocate for Remain, against the majority of his own party, which is a tricky position to be in ahead of the Conservative leadership contest later in this Parliament. Osborne may be reluctant to introduce policies that will offend his backbenchers and their constituents.
Besides, he might not even need to. The OBR might rescue him, as it did ahead of the Autumn Statement, by revising its forecasts for the public finances in a positive direction. Back then, they found, as we said above, an extra £27 billion in their spreadsheets. Now there’s conjecture that, thanks to ‘tumbling government borrowing costs and lower-than-expected inflation,’ there might be another £20 billion. That would really come in handy for a Chancellor who wants to bring down the deficit, but who doesn’t necessarily want to bring in swingeing policies to do so.
Even if Osborne doesn’t get this windfall, his Budget won’t all be doom and gloom. We’re delighted that it will contain provisions for allowing driverless cars to be tested on British motorways from next year, and we’re sure that there will be other policies we like too. Or will there be? The answers will come on Wednesday. This blog shall, of course, have more coverage after the event.