Budget: Chancellor smooths pace of spending cuts but still a lot of pain to come

New projections by the OBR show that public borrowing will be lower than expected this year, but will then fall more slowly over the next three years as the Chancellor has smoothed the previous rollercoaster path of planned spending cuts.

The total amount of fiscal tightening to come will be similar to previous plans, but spread over a longer period of four years, with the budget only moving into surplus now in 2019/20 rather than 2018/19 as in the March projections. But the end point is similar, with a slightly higher budget surplus of £10 billion now expected in 2019/20, relative to the March plans of a £7 billion surplus.

Public sector net borrowing projections (£ billion excluding public banks)

The Chancellor has decided to end austerity a year later than planned in his March Budget, but with broadly the same end point of a small budget surplus by 2019/20. This results in a smoother profile of real spending cuts, which is sensible in allowing affected government departments, local authorities and households to adjust.

But there is still a lot of pain to come. Welfare cuts totalling £12 billion by 2019/20 will weigh heavily on lower income working age households, although the new national living wage will offset this for some workers. Unprotected government departments and local authorities will face a further Parliament on basic rations.

Restricting public pay growth to 1% per annum for the next four years may be needed to get the deficit down, but will pose challenges in attracting and retaining talent to the public sector over a period when private sector earnings are likely to be growing at around 3-4% per annum.

It is prudent for the Chancellor to aim for a budget surplus as a buffer against future economic shocks at a time when initial public debt levels are high due to the legacy of the financial crisis. But it may not be sensible to aim to run overall budget surpluses indefinitely as this could unduly restrict the scope for the longer term public sector investment that Britain needs to strengthen its national infrastructure.”

The Budget has set out in more detail how the Chancellor will achieve a reduction in borrowing that he promised before the election. So for the financial markets and businesses, this provides stability and maintains consistency with the financial plans we have seen over the last five years.

For business, there are swings and roundabouts. Corporation tax will be cut further. But by introducing the new national living wage, the Chancellor is shifting some of the burden of supporting low income households from the public purse to employers.