Ivan Fallon: British economy in good shape but the tide has turned

Four months ago, when chancellor George Osborne delivered his autumn statement, he could boast of presiding over the strongest major economy in Europe, but he is in a trickier position now as the EU referendum approaches.

George Osborne’s latest budget is unlikely to be “feelgood” with another round of expenditure cuts in the offing. Peter Nicholls / Reuters
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LONDON // George Osborne, the British chancellor of the exchequer, will present his budget tomorrow, his eighth, a post-Second World War record exceeded only by George Brown. Four months ago, when Mr Osborne delivered his aut­umn statement, he could boast of presiding over the strongest major economy in Europe ­(although Ireland, not in the “major” category, is doing better) and the second-strongest, after the United States, in the G20. Economic growth was set for 2.4 per cent this year, the fourth suc­cessive year of solid economic growth. And he was well on course to meet his promise of running a surplus in “normal” times, which means when economic growth is 1 per cent or more.

But events, which had been remarkably favourable to Mr Osborne in his tenure as chancellor, have since turned against him. On Friday he was forced to admit that the official size of the UK economy last year was 1 per cent smaller than the £1.88 trillion (Dh9.93tn) that the Treasury was projecting only three months ago, and that an £18 billion shortfall in tax receipts would persist for the rest of the decade and threaten his target of balancing the books by 2020.

The main cause of this new black hole was lower than expected earnings and inflation, which fell to zero in the final quarter of last year, a figure Britain has never seen before. One would have thought the Treasury mandarins would have seen that one coming.

The British economy is still in pretty good shape, just not what Mr Osborne hoped for at this critical point in the European debate, and not good enough to get away without another round of expenditure cuts. His 2.4 per cent projected growth in November is now expected to be shaded down to 2.2 per cent and some economists are saying even that is too high – 2 per cent is more realistic, the lowest growth rate since 2012. Prospects for 2017 will also be downgraded.

It is not where Mr Osborne wants to be, approaching the June referendum on whether the United Kingdom should stay in the Euro­pean Union. He spent the weekend preparing the ground for his new round of cuts, warning, as he has done repeatedly of late, that “the world is a more uncertain place than at any time since the financial crisis and we need to act now so we don’t pay later”.

Cynics point out that as the UK economy has slowed and his over-optimistic forecasts have been confounded, he has taken to blaming the global economy in much the way Mr Brown did – or as any leader in the world for that matter has also done ­(Jacob Zuma, for instance, places all the blame for South Africa’s miserable economic performance on the world economy).

In truth it is difficult to keep the British ship on course in the teeth of the nasty storms blowing across the world, not least in Europe, where the focus is going to lie for the next three months.

Mr Osborne on Sunday morning told the BBC’s Andrew Marr that he will use the budget to announce further cuts “equivalent to 50 pence in every £100” of public spending by 2020 – not, as he modestly pointed out, “a huge amount in the scheme of things”. But he has been forced to rule out the old reliables such as an increase in petrol taxes because of opposition from his own backbenchers. A bold proposal to raid employee pensions plans, disguised as long-overdue pensions reform, also threatened a rebellion and had to be abandoned, forcing Mr Osborne to look elsewhere, which inevitably means the Ama­zons, Googles and other big tax-avoiding multinationals, as well as the banks (again), both of those being “soft targets”.

Mr Osborne had hoped to announce a seriously “feel-good” budget, which would have cheered his supporters and set the tone for the economic debate between now and June, and for his own pretensions to the Tory leadership when David Cameron steps down, which he is now pledged to do before the next election. Mr Osborne will still make it sound pretty good, with lots of measures to build new houses, plans for infrastructure projects and progress towards his balanced budget. And he will get away with it because of the dysfunctional Lab­our opposition, which digs itself into a deeper hole day by day and is well out of its depth when it comes to unravelling the chancellor’s often dubious sums.

But underneath the bombast and the cheery rhetoric, the chancellor will be very much on the defensive when he delivers his budget. As the Financial Times concluded in an editorial at the weekend, "he has taken risks: for the moment they are not coming off". His task is a lot harder than he thought it was going to be back in Nov­ember when it was all going swimmingly well. And there is an awfully long way to go before June. Who knows what events will blow him off course before then?

Ivan Fallon is a former business editor of The Sunday Times.


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