A More Positive Austerity

Martin Sawer is a senior director in APCO’s London office and previously served in the private office of former Prime Minister Margaret Thatcher.

How long will the UK’s “age of austerity” last?  And for how long will the electorate put up with it?  George Osborne, the Chancellor of the Exchequer in the UK’s coalition government had originally predicted that he was managing a one Parliament (5 year) ‘austerity’ government – the commentators were not so sure before today, but now we also know that Osborne has given up that hope and today he confirmed that austerity will continue through the next electoral test of his government in 2015.

But, every Chancellor of the Exchequer has the resources of the civil service machine at their disposal and can utilise market confidentiality in order to maximise any political and media wins to be gained. In particular, a Chancellor of whatever government will want to wrongfoot the opposition. So we can always expect an economic rabbit to be pulled out.

Today’s version was a major surprise – the independent forecasters at the Office of Budget Responsibility predicted that, contrary to expectations, the UK public finance deficit would continue to fall, in spite of weaker economic indicators. But for that deficit to fall, the forecasters are relying on increased future revenues from exports and overall business growth, not something everyone is confident of. Revenue and Customs have also been given extra resources to chase down the tax the politicians believe should rightfully be in the UK’s coffers. It could be that the sale of 4G licences has been factored in.

The second target of Osborne’s strategy has slipped by twelve months, with national debt not expected to fall now until 2016-17; therefore, he will be fighting the next General Election with rising debt levels, not something envisaged during the 2010 General Election. But his opposite number in the Commons, Ed Balls, was unable to fire both fiscal barrels and so we were quickly into the detailed political sops. Presenting the UK as a “place to do business”, especially with the crisis in the Eurozone, is of critical importance to this government, Thus, businesses will be pleased by the continuing downward trend for corporation tax, the extension of small business rate relief, increased export support and the infrastructure projects announced.

The personal taxation changes will of course be directly relevant to individual circumstances, but were largely right-wing tinkering. They peg benefit increases and personal taxation relief increases to below inflation which assures the Treasury of much-needed revenues.  The scrapping of a planned fuel duty increase was another typically populist card that any Chancellor would play to gain short-term relief. It is the longer term economic stability in the run-up to 2015 that will have been at the heart of George Osborne’s thinking today. And with so many external factors outside the Chancellor’s control, he knows he is not out of the woods yet.