The Budget was low-key and does not meet its aim of placing the UK on a "credible path of fiscal consolidation". The projected fall in borrowing over the medium term continues to rest on optimistic economic and financial assumptions and an absence of detail about future spending cuts.
The Chancellor has been able to create the illusion of fiscal progress by revising up excessively-pessimistic revenue projections presented in the April 2009 Budget and carried over to December's Pre-Budget Report (PBR). Net taxes and national insurance contributions are now forecast at 33.9% of GDP in 2009-10 versus 33.2% in the PBR. This explains the cut in public net borrowing from 12.6% of GDP to 11.8%.
The revenue "windfall" carries over to future years, accounting for the cut in the 2014-15 borrowing projection from 4.4% of GDP in the PBR to 4.0%.
Projections for spending, by contrast, are little changed. Total managed expenditure (TME) is forecast to fall from 47.9% of GDP in 2009-10 to 42.3% in 2014-15. The 5.6 percentage point decline over five years is ambitious but not unachievable – TME fell from 47.8% of GDP to 38.9% between 1983-84 and 1988-89. The Chancellor, however, provided no new information on the departmental distribution of cuts. Capital spending will be a major casualty, falling from 4.9% of GDP in 2009-10 to 2.6% by 2014-15, at odds with the claim that the Budget is designed to support investment.
The forecasts for debt interest continue to look optimistic. Net interest is projected to rise from 1.9% of GDP in 2009-10 to 3.3% by 2014-15. The latter figure, however, implies an average interest rate on net debt of only 4.4%, effectively assuming away any future funding difficulties. Each one percentage point rise in the average interest cost would boost the 2014-15 net interest bill by 0.7% of GDP.
The various Budget measures were designed to attract headlines but are insignificant in macroeconomic terms. A net "giveaway" of £1.4 billion in 2010-11 is offset by tax changes yielding £150 million and £705 million in 2011-12 and 2012-13.
The Debt Management Office projects that net gilt sales (i.e. gross sales minus redemptions) will fall from £211 billion in 2009-10 to £148 billion in 2010-11 – a smaller decline than expected, reflecting a cut in Treasury bill financing from £19 billion to -£2 billion. Assuming no further Bank of England buying, the supply of gilts to be absorbed by the market will rise from £28 billion this year to the full £148 billion in 2010-11 – well above the previous record of £110 billion in 2008-09.