Dermot Finch

Recession could go on

Now that we're back in recession, today's Queen's Speech feels like a bit of a distraction. There's not much in there that will fundamentally turn GDP back into positive territory, other than the Enterprise & Regulatory Reform Bill - and even that will have only a marginal effect.

Although the grandest day in the Parliamentary calendar, the Queen's Speech isn't the principal lever for changing economic policy - that's the Budget of course, and maybe the Autumn Statement. The problem for George Osborne is that he squandered his Budget opportunity in March, and will now have to wait until November before he can announce any new substantive measures to boost growth.

In the meantime, the recession could drag on until the middle of this year. According to the ONS, GDP shrank by 0.3% in the fourth quarter of last year, and by another 0.2% in Q1. The Office for Budget Responsibility got Q1 wrong, forecasting positive 0.3% GDP - see this chart.

But the OBR predicted that Q2 would be worse, falling to zero growth, due to one-off factors like the Jubilee and Olympics. If Q2 is worse than Q1, then we should expect the recession to continue until the middle of this year.

I understand that Number Ten is bracing itself for these further bad growth numbers. That would place extra pressure on the Chancellor to come up with a more compelling growth plan, not least from his own backbenchers.

Labour, meanwhile, will feel that their "too far, too fast" line has been vindicated. However, following their strong performance in last week's local elections, they will come under renewed pressure to explain what they would do differently. Currently, we've got Ed Balls's Five-Point Plan - but that now feels a bit stale and piecemeal, especially if the recession carries on until mid-year.    

Budget: tax takes centre stage

Until today, George Osborne’s set pieces have all been about the deficit and spending cuts. The Emergency Budget, the Spending Review, and last year’s Budget were all dominated by red ink and shrinking budgets. Today’s Budget, by contrast, was all about tax – but the deficit is still massive, spending cuts are only just beginning, and strong growth is still some way off.

For once, the Office for Budget Responsibility delivered a broadly similar forecast – with growth and borrowing numbers roughly the same as last November. Osborne will be relieved by that. But those numbers are still quite daunting - this year the economy will hardly grow at all, and net borrowing will hit £122 billion.

The Budget headlines write themselves. Action on the top and lower end of the tax scale is already dominating coverage.

Osborne is reducing the top rate from 50p to 45p (from April 2013) because “it damages the economy and raises next to nothing”. He claims the replacement new taxes on the wealthy (principally the 7% Stamp Duty on swanky £2m+ homes) will raise £500m a year – more than the 50p rate was raising. Osborne asserted today that “the richest will pay more” as a result of these changes. He will need to prove that over the next few years.

The personal allowance increase from £7,475 in 2011 to £8,105 next month and £9,205 from April 2013 will be hailed as another victory by the Lib Dems – and many Tories, who will also be keen to claim credit for this. This will take lots of people out of tax altogether, but it won’t benefit the poorest who don’t pay any tax – and it will reduce tax credits for some low-income families. Also, the slightly more generous allowance for the over-65s will be phased out, so that’s an effective tax increase on pensioners.

Slightly less visible, the 40p higher rate will kick in a bit sooner (at £41,450) from April 2013 onward – which means a tax increase for 300,000 middle-earners. The Treasury has done this before: Gordon Brown often used to freeze the 40p threshold when he was Chancellor, and this tax year 2011/12 the 40p threshold was reduced. The squeezed middle will also be hit by the phased withdrawal of Child Benefit for families with one parent earning more than £50,000.

These headline-grabbing tax measures won’t do much to boost growth – which is still Osborne’s major headache. Some significant pro-growth measures were announced today, including an accelerated reduction in Corporation Tax (to 22% by 2014) and an overhaul of planning (to be revealed next Tuesday). But these don’t yet amount to a compelling growth narrative, nor do they guarantee a return to strong growth – which will be essential if Osborne is to help secure a Conservative majority in 2015.

Labour, meanwhile, has been handed a few new lines. They will now argue that the Coalition is squeezing the middle even more, penalising pensioners and families, while gifting tax cuts to the most wealthy. But they too will be worrying about growth – their Five Point Plan isn’t that compelling either, so like the Coalition they need to come up with a more convincing set of proposals before 2015.

Budget preview

Here are a few points ahead of tomorrow's Budget.

After two years dominated by spending cuts, tomorrow's Budget headlines are more likely to be about tax. Growth, still rather elusive, will get a few more shots in the arm.

Growth remains the Chancellor's top priority. The Coalition will stand or fall on its growth record, so Osborne needs to see a genuine recovery well ahead of 2015. Last year's Budget was billed the Budget for Growth, but the Government's Plan for Growth - including measures such as lower corporation tax and Enterprise Zones - has not yet delivered. The Coalition has certainly grasped the deficit reduction lever, but there's a widespread view that Osborne does not yet have a compelling growth plan.

Over the last year, the official OBR forecasts have moved in the wrong direction. 2012 growth was revised down sharply last November, from 2.5% to 0.7%; and 2013 dropped from 2.9% to 2.1%. Osborne has also had to admit that the structural deficit will not be eliminated until 2016/17 - well into the next Parliament.

The Chancellor will be relieved that tomorrow's OBR forecasts are no worse. After a series of downward forecasts, the OBR will publish pretty much the same outlook - if anything, it could be slightly better than in November. 

Osborne will want to present a more aggressive growth plan than in his last Budget. The new elements have already been well trailed - planning reform, infrastructure investment, an end to national pay bargaining. But Labour will still argue that the Coalition's plan is backfiring - with borrowing, unemployment and growth all worse than Osborne expected in 2010.

Meanwhile, tax will be the dominant story. The 50p story has been well signalled already - looks like the top rate will be reduced to 45p from April 2013 onwards, and down to 40p before the election. The £10k threshold has been equally well trailed - the Lib Dems will get their way, with the personal threshold increased to around £9k, taking more low-earners out of income tax altogether. Other tax measures are likely to include limiting tax relief on pension contributions for higher-rate taxpayers - and the annual attempt to close down tax loopholes.

I'll be looking out for the 40p threshold. Currently, 40p income tax is paid on earnings above £42k. Previously, Chancellors have frozen or reduced that threshold - a rather clever and lowkey way of bringing more people into the 40p band. I wouldn't be surprised if Osborne did something similar tomorrow.

Labour's response tomorrow will no doubt focus on 50p. Ed Miliband's lines almost write themselves. He will say the Budget is exacerbating inequalities, we're not all in this together, and more action is needed to stimulate the recovery. His challenge tomorrow is to restore Labour's fiscal credibility - that means coming up with an alternative growth plan, without spending loads of money we don't have.

Autumn Statement: game-changer

Last week's Autumn Statement has changed the political dynamic, for the rest of this Parliament and beyond. Here's why.

The game changer was George Osborne's confession that the structural deficit will still be around until 2016/17 - two years later than initially planned, and well into the next Parliament.

The Chancellor is still on course to meet his fiscal tests (just), but only because he's pencilled in £15 billion of additional spending cuts in each of the two years after the 2015 election.

This means that the next election will be another austerity election. If we are to remain credible on the international stage, each of the three main parties will need to fight the election on manifestos that include spending cuts - not the usual promises of financial largesse.

For Osborne, the risks are clear. His personal credibility is now on the line. He will not want to repeat Tuesday's experience of telling the House of Commons about another downward revision to his growth plans.

If the structural deficit gets any worse, and stretches beyond a five-year horizon, it will look like Osborne has lost control of events. So he will be praying for a euro rescue package and a growth rebound in 2013.

For Nick Clegg, the dilemma of Coalition life has just become sharper. For as long as they remain in the Coalition, the Lib Dems have to continue supporting the Chancellor's deficit reduction plan - which now includes those £15b per year spending cuts right after the 2015 election.

Although they plan to fight their own separate campaign in 2015, the Lib Dems have just been pulled deeper into their pact with the Conservatives, and are now collaborating on spending cuts into the next Parliament. This will make it harder for them to present a separate face to voters in 2015.

For Labour, the new fiscal reality is just as uncomfortable. Although the immediate sense of schadenfreude might appeal, the longer-term implications of a prolonged structural deficit are very tricky.

Eds Miliband & Balls will now have to contemplate making their own deep spending cuts, if they win the 2015 election. They will inherit a depleted public sector, impatient for payback after five years of real-terms pay cuts. But Labour won't be able to promise much.

Voters won't be bothered that much by the structural deficit itself. But they will be bothered by the implications - prolonged spending cuts. The three parties are only just coming to terms with what this means for them - and it's not pretty.

U-turns: who's next?

Caroline Spelman must be feeling just a little bit smug by now. Since being slated for her forests U-turn in February, the Coalition has excelled itself in the art of U-turning. On prisons, NHS reform, and now News International. Step forward Ken Clarke, Andrew Lansley and Jeremy Hunt. Their about-turns make Caroline's look tiny by comparison.

Who's next, I wonder? With GDP growth so weak recently, inflation well above expectations, and borrowing likely to be higher than he first thought, George Osborne may need to revisit his deficit reduction plans. It's entirely possible that the Office for Budget Responsiblity could warn the Chancellor this autumn - on the eve of his Autumn Statement - that he's not going to deliver his two-pronged Plan A, to eliminate the structural current defict by 2014/15 and have debt falling as a percentage of GDP by then too.

Just recently, Osborne has started talking about the (cleverly disguised) "flexibility built into" his plans. Currently, his fiscal mandate is to eliminate the structural current deficit and meet his debt target one year later (by 2015/16), so he has some wiggle room there. And if that's looking unachievable, next year's Budget could push the target back another year to 2016/17 by triggering a rolling 5-year timeframe.

In reality, the impact of tweaking Plan A would be more political than economic. It would be embarrassing for the Chancellor, and give Ed Balls a lot of ammunition. But it wouldn't necessarily make Osborne change course - his tax rises and spending cuts would still happen as planned, it's just that they wouldn't erase the non-cyclical deficit as quickly as originally hoped.

Of course Osborne would never admit it, but any change to Plan A would be seized on by Labour as a major U-turn. Mainly because he was so bullish about achieving it, in the first place. But he shouldn't feel too embarrassed about U-turning. With so many Cabinet colleagues already embarked on their own U-turn, Osborne won't be alone.

Osborne's Budget: things will get worse, then better

The Chancellor today signalled two years of intense pain, followed by a solid recovery from 2013 onwards. Rather than "things can only get better", things will get quite a bit worse for a while. He and the Coalition need to hold their nerve until then.

Here's our take on the Budget headlines.

The Coalition’s fortunes are heavily dependent on the economy returning to healthy growth, well before the 2015 general election. That is George Osborne’s mission, and his Budget today was intended to move the agenda from cuts to growth.

The defining question of this Parliament is: will Osborne’s plan work? He says yes, Ed Miliband says no. Whoever is right stands the best chance of winning in 2015.

Compared to last November’s forecasts, the Chancellor now faces weaker growth this year (1.7%), plus higher inflation (4.2%) and unemployment (8.2%). But the economy is still set to rebound from next year onwards, with GDP up to 2.9% by 2013.

The headline budget deficit is now forecast to be slightly lower this year, but £25 billion higher over the next three years. But the structural deficit remains on track to be eliminated by 2014.

Tonight's headlines are dominated by the fuel duty cut. But the best time to judge the political impact of this Budget will be a year or two from now. If growth continues to be revised down, Osborne's plan will start to look more like a gamble. If the recovery takes hold, he will be lauded as the bold architect of his party's re-election.

Pre-Budget applause for Osborne

I mentioned yesterday that George Osborne is getting rave reviews ahead of the Budget - from the likes of Ben Brogan (Daily Telegraph) and James Forsyth (Spectator).

Here's another round of applause for the Chancellor - this time from the FT's George Parker. In a fascinating profile, Parker charts Osborne's rising stock over the past year.

Before the election, Osborne was considered by many (including Peter Mandelson and Mervyn King) to be a liability - "too young, an economic novice, too political". I wrote about this last November - in particular, Mandelson's jibe that Osborne was "the weakest link" in the Tory front bench.

Mandelson's changed his tune now. He tells the FT: "He's become a more authoritative figure. Before the election, he was seen as rather tactical and political. But now he is strong and pronounced in his policy preferences." Praise indeed.

Osborne predicted last year that he would become "public enemy number one", within six months of the election. But, as Parker highlights, Nick Clegg has filled that role - not Osborne. 

Parker reports that Osborne has shifted the centre of his operations from the Treasury to 11 Downing Street. This is very different to his recent predecessors - but very similar to Nigel Lawson, who much preferred Number 11. Osborne spends most mornings in Downing Street, and just a few hours at HMT - and is back in Downing Street for the daily "four o'clock" with Cameron's inner team. He even helps Cameron every Wednesday to prepare for PMQs.

Looking ahead to post-Cameron, Osborne has apparently been creating "an awesome network of support that could sustain a bid for the leadership when Cameron finally stands down". As I reported last November, he's also well-liked by Treasury officials - not least because he personally hand-signed thousands of Christmas cards. And he's invested a lot of time with the influential Conservative opinion formers - hence the rave reviews this weekend.

But Osborne's fortunes are entirely dependent on his Plan A working. He needs the economy to turn around during this Parliament. If it does, he's well-placed to succeed Cameron. If it fails, Osborne is toast.

Budget for Growth: sideshow or turning point?

Speculation is mounting about next week's Budget. It's not clear whether it will be a sideshow or a turning point. One minute, the Treasury is briefing that it will be low key - the next, they are talking it up as "the big bang on growth".

Here's my preview of the Budget - including my tips on what the Budget growth package is likely to contain. Look out for the first chunk of the Government's Growth Review, action on fuel duty, a new wave of Enterprise Zones, a big push on deregulation and tax simplification, radical reforms to local government finance, and possibly a move to encourage savings.

The Chancellor is under real pressure to deliver a compelling and credible growth package. The Office for Budget Responsibility will publish its latest forecasts on Budget Day - and they are likely to revise down 2010 and 2011 growth. Osborne is under pressure from his own backbenchers, many of whom are pushing hard for a "supply-side revolution". And he's facing a perfect storm of rising inflation, unemployment and interest rates.

The Chancellor will do his best to produce a credible growth plan, and no doubt some theatre. He has some wiggle room, after better than expected revenues in January - so there may be one or two rabbits emerging from his hat. But whatever he announces on Wednesday is likely to be overshadowed by the massive spending cuts about to start in April - and the escalating crises in Japan, Libya, Bahrain.

Osborne is riding high right now, especially compared to his more accident-prone Cabinet colleagues. He's getting rave reviews from the likes of Ben Brogan - who wrote yesterday that "the Chancellor displays confidence and mastery of his department". He will want to make sure his Budget doesn't disappoint.

 

2010 growth to be revised upwards

The Office for Budget Responsibility publishes its autumn growth forecast tomorrow (Monday). GDP growth this year is likely to be revised upwards, from 1.2% to close to 1.8% (according to the FT) - partly because consumers are bringing forward their spending, to avoid the VAT increase in Jan.

This isn't a total surprise. Quarterly growth numbers have been coming in quite strongly recently. Last month, commenting on the Q3 growth figures, I said: "The Office for Budget Responsibility has (rather modestly) forecast 1.2% growth over 2010 as a whole. That will probably be revised upwards on 29 Nov, when the OBR publishes its next forecast."

Higher growth this year means the 2010/11 deficit of £149bn will end up being a bit lower. That will please George Osborne, who will respond with his Autumn Statement tomorrow. But Labour will also want to take some of the credit, and will question whether all the Coalition's spending cuts are really necessary.

Of course, we shouldn't get too complacent. It seems like some growth is being brought forward from next year to this year. That means the OBR's forecast of 2.3% growth for 2011 will probably be revised down a bit. So although this year looks less bad than expected, next year will be no better.

Housing Benefit: deja vu

The Coalition's plans to reform Housing Benefit dominated Prime Minister's Questions yesterday. David Cameron defended the need to reduce the annual £20 billion Housing Benefit bill. Ed Miliband expressed outrage at the consequences. But neither of them spotted that we've been here before...

Let's go back to this House of Commons report in 1998 on the Working Families Tax Credit, which includes the classic quote: "Reforming housing and Housing Benefit policy raises many difficult questions which have defeated successive governments in the past."

Then this story in 1999, about the Labour Govt abandoning plans to scrap Housing Benefit. Chancellor Gordon Brown had proposed major reforms to Housing Benefit in his 1999 Budget, which by then was costing £11bn a year. Social Security Secretary Alistair Darling was at the time very concerned about "the fraud and abuse which is endemic in the (housing benefit) system".

And this story in 2002, about Labour once again shelving its plans to reform Housing Benefit. Brown wanted to reform Housing Benefit, because it was acting as a major disincentive to work. But major reform would have generated lots of losers among Labour's core vote.

You get the picture: Housing Benefit reform has been tried before, and it's difficult.

Ed Miliband was one of those who tried to reform it. I was in the Treasury with him at the time. We sat around the same table, trying to work out how to minimise the number of losers. But it all proved too difficult.

The Coalition's proposals today are way more radical and extreme than Labour ever planned in the late 90s. Capping Housing Benefit payouts to £400 per week, and reducing by 10% payouts for 1-year jobseekers, will both result in benefit claimants having to move.

But Labour should remember that they also worried about the spiralling costs of Housing Benefit. They wanted to reform, but didn't for fear of alienating their core vote. And if they were in government now, they would almost certainly be reforming Housing Benefit given its £20bn per year price tag.