Long, long slog to mend public finances

This year's tax harvest is not as bountiful

There are three big new fiscal stories in this year's Autumn Statement (please try to contain your excitement).

The first one is that public sector borrowing this year is expected to fall by just over 6% to £91.3bn - but that is a good deal less than the 13% fall that was expected just nine months ago in the budget.

And, by the way, the deficit - at 5% of GDP or national income - is still uncomfortably wide (greater, for example, than the deficits of France and Italy, which are widely seen as in worse economic and fiscal shape than Britain).

So the job of mending the public finances is a long way from over.

The second story is that the best performing, big developed economy in the world - that's us by the way, as assessed by speed of GDP growth - is generating far less tax than expected.

So this year, the Office for Budget Responsibility expects the harvest for the Exchequer from taxation to be £7.8bn less than it predicted in March. And by 2017-18, it says the shortfall will be an eye-watering £21bn.

And the biggest shortfall, roughly half of it, is in income tax, which reflects the creation of lots of new low wage jobs and the absence of meaningful pay rises for millions.

Inflation windfall

What is striking is that the OBR seems to see this shift to lower wages and taxes as, to an extent, reflecting a change in the structure of the economy, rather than a passing phenomenon.

The third story is that there are two useful windfalls for the government, from the fall in the interest rates it has to pay on its debts and from the fall in inflation.

The government is expected to pay £5bn less in interest on gilts or its debts this year than was expected in March. And by 2017-18 that saving will have increased to about £16bn - as the Treasury gets the cumulative benefit of refinancing its existing debts at lower rates of interest.

Also by 2017-18 the Treasury should save around £3bn on welfare and public-sector pension payments, because the fall in inflation should mean lower cash increases in these outgoings.

For the birds?

What matters is that the swings and roundabouts of less tax, lower interest payments and lower inflation mean nothing much of any significance has happened to the government's plans to generate a surplus by 2018/19 - which it now expects to be a surplus of £4bn, up from a forecast £3.7bn made in March.

That allows the Tories and LibDems to claim that they remain on course to fill the black hole in the public finances - albeit a few years later than they promised when elected in 2010.

And it also allows Labour to complain that fiscal rehabilitation, in the style of Tories and LibDems, always comes tomorrow (although Ed Balls's alternative prescription, which some see as paradoxical, is to promise to balance the books later than the Tories and in a less demanding way).

There are two more things to say.

One is that it is altogether plausible that wages could rise faster than the OBR expects, as could inflation and interest rates. In which case all its fiscal forecasts would be for the birds.

New contract?

The second is that the OBR has shone a very bright light on the implications of the Tories' pledge to generate a budget surplus by 2019/20 from spending cuts rather than tax rises.

It shows that that if a new Tory government delivered on its pledge to protect spending on schools and hospitals, the cuts for other public services - such as the police, courts, social services, local government and so on - would be so big as perhaps to defy credibility.

The OBR calculates that spending per head in real terms in 2019/20 on the public sector minus health and schools would be £1,290, or 57% less than in 2009/10.

Could savings of that magnitude be achieved, without completely changing the implied contract between citizen and state?

Doubtless, in some form or other, that will be part of the debate between now and a general election, which begins to feel quite close.

UPDATE: 18.20

The Tories say that future cuts to ministerial budgets may be less than the OBR expects for two reasons

First, they say they can increase revenues by £5bn by a further attack on tax avoidance.

And they also say there is the potential to save more from the welfare bill.

Their hope is that this would reduce the magnitude of cuts to public services by a half.

But they are yet to provide detail on these alternative deficit-reduction measures.

And even with them, the size of future shrinkage to the state would still be quite something.