The Chancellor had less fiscal room for manoeuvre than some had expected, so needed to raise extra revenue to finance modest giveaways. His key announcements have a clear political rationale but lack economic logic. The fiscal plans continue to rest on an assumed large cut in current spending of questionable deliverability.
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The most costly measure is a further increase in the personal allowance, but a rise in the NI threshold would have been a better way of targeting low earners.
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The Chancellor also spent money on a new savings income allowance and an ISA subsidy for first-time homebuyers. The former further complicates the taxation of savings, while the latter will mainly boost house prices rather than housing supply.
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These measures are paid for partly by a further raid on the banks, which will be passed on in lending and deposit rates. In addition, the lifetime pension allowance is reduced again, discouraging long-term saving. The Chancellor, instead, should have taken the opportunity provided by lower oil prices to raise fuel duty.
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The underlying borrowing path has been revised down by less than expected, with lower debt interest and welfare costs offset by a fall in North Sea revenues and weaker stamp and excise duties.
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The debt to GDP ratio now begins falling in 2015-16, a year earlier than before. However, this is achieved by bringing forward asset sales, in the form of UK Asset Resolution mortgages and Lloyds shares – the public sector’s net wealth is unchanged.
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As expected, the Chancellor raised his public spending assumption for 2019-20, so that expenditure as a share of GDP now bottoms out just above its level in 1999-2000, rather than falling to its lowest since the 1930s. This undermines a key Labour attack line with one keystroke.
As before, the Chancellor’s claim that the deficit is on a smooth glide path to elimination by 2018-19 rests on an ambitious cut in the share of current spending in GDP in the early years of the next parliament. The share is projected to fall by 3.7 percentage points of GDP in the three years to 2017-18, a pace of reduction previously achieved only in boom conditions in the late 1980s – see chart. A major weakness of the current system of fiscal planning is that the OBR must incorporate the government’s spending assumptions in its forecasts, despite an absence of detail and widespread doubts about their achievability. Mr Osborne referred to the tendency of former Chancellors to fudge their figures but he is equally guilty of fantasy forecasting.