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Osborne set to impose extra spending cuts in Budget George Osborne set to double down on spending cuts in Budget
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George Osborne is set to take a fateful decision to double down on austerity in his Budget next month in order to hit his controversial budget surplus target, the Chancellor himself has intimated. George Osborne is set to take a fateful decision to step up austerity in his Budget next month in order to hit his controversial budget surplus target, the Chancellor himself has intimated.
Speaking to the BBC in Shanghai, where he is attending a G20 finance ministers' summit, Mr Osborne warned the “storm clouds” over the global economy were holding Britain back and that “our own economy is not as big as we had hoped”. Mr Osborne warned that “storm clouds” over the global economy were holding Britain back and  “our own economy is not as big as we had hoped”.
He added: “We may need to undertake further reductions in spending because this country can only afford what it can afford and we will address that in the Budget”. “We may need to undertake further reductions in spending because this country can only afford what it can afford and we will address that in the Budget,” he told the BBC in Shanghai, where he is attending a G20 finance ministers’ summit.
Cutting more at a time when the Treasury is already planning steep new reductions in public spending would re-open the Chancellor to the charge that he is slashing back the state for ideological reasons. And his critics are likely to point out that spending cuts reduce growth in the short-term, running the risk that the additional consolidation will be self-defeating even in its own terms. “We’ve just had figures that show the economy is smaller than we thought in Britain, and we also know that global risks are growing and Britain is not immune to those things.”
The decision is also gamble because it is uncertain how the news of more austerity will feed into the EU referendum debate. Cutting more at a time when the Treasury is already planning steep reductions in public spending would reopen the Chancellor to the charge that he is slashing back the state for ideological reasons. And his critics were quick to point out that cuts reduce growth in the short term, running the risk that the additional consolidation will be self-defeating. 
The Budget will be held on 16 March and there have been a host of predictions the Office for Budget Responsibility, the Treasury’s independent forecaster, could revise down its estimates of the tax revenues that will flow into the Treasury’s coffers over the rest of the decade due to a weakening economic outlook for the UK. The terms of the Chancellor’s self-imposed “fiscal mandate” compel him to put the public finances on course to show an absolute budget surplus in 2019-20. John McDonnell, Labour’s shadow Chancellor, said Mr Osborne’s comments represented “total humiliation”, adding: “Far from paying our way, Osborne’s short-term economics means Britain is deeper and deeper in hock to the rest of the world.”
Last October the OBR forecast the budget to be in surplus by around £10bn in that financial year. But a downgrade to expected tax revenues by the OBR in the Budget could easily wipe that cushion out and compel the Chancellor to take action if he still wants to meet his cherished target. "If the Bankers' Chancellor had been doing his job properly he would be collecting taxes from Google and other tax-dodgers. Instead he is threatening the British people with paying an even higher price for his own failures.
Mr Osborne’s comments yesterday are a strong indication the OBR has indeed become more pessimistic about the expected tax take and that the Chancellor has decided to respond by cutting spending further. The Treasury meets with the OBR in the weeks before each Budget and Autumn Statement and HMRC officials learn what the “fiscal envelope” for spending is likely to be. "Labour and a growing coalition that now includes the OECD and the IMF are calling for an economy based on increased investment. The truth is that the biggest risk to the British economy is George Osborne."
Instead of cutting more, the Chancellor could, if he chose, decide not to take action to hit the surplus target in the fiscal mandate, which has been widely criticised by independent economists. The IFS has called Mr Osborne’s mandate as “inflexible” since it can compel “big tax rises or spending cuts at very little notice to ensure it is met”. The fact that the surplus target makes no allowance for state infrastructure investment spending – which should ultimately pay for itself in the form of higher tax revenues – has also drawn extensive criticism. But Mr Osborne’s interview suggests he is sticking with the target. Mr Osborne’s decision is also a gamble as it is uncertain how news of more austerity will feed into the EU referendum debate. The Budget will weakening economic outlook. The terms of the self-imposed “fiscal mandate” compel Mr Osborne to put public finances on track for an absolute budget surplus in 2019-20.
Other forecasters, including the Bank of England and the OECD, have been slashing their growth predictions for the UK in recent months in the face of the slowing global economy and the Government is currently on course to miss its 2015-16 deficit target of £73.5bn by around £6bn. Last October, the OBR forecast the budget to be in surplus by around £10bn in that financial year. But a downgrade to expected tax revenues could easily wipe out that cushion and compel the Chancellor to take action if he still wants to meet his cherished target.
In its own “Green Budget” earlier this month the Institute for Fiscal Studies warned that tax revenues are “volatile and uncertain”. At that time the IFS’s director, Paul Johnson said: “How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as Chancellor”. Mr Osborne’s comments are a strong indication that the OBR has become more pessimistic about tax take and that he has decided to respond with further cuts. The Treasury meets with the OBR in the weeks before each Budget and Autumn Statement and HMRC officials learn what the “fiscal envelope” for spending is likely to be.
The Chancellor used an unexpected £27bn upward revision to expected taxes over the five years to 2019-20 in the Spending Review last year to ease the scale of his planned cut to public services and still hit his surplus target. That led to a number of City of London analysts to joke that the OBR had rescued the Chancellor by finding more money “down the back of the sofa”. But Robert Chote, the chairman of the OBR told the Scottish Parliament Finance Committee in January, when questioned on this subject, that “what the sofa gives, the sofa can easily take away”. Instead of cutting more, the Chancellor could, if he chose, decide not to take action to hit the fiscal mandate, which has been widely criticised by independent economists. The Institute for Fiscal Studies has called the mandate “inflexible” as it can compel “big tax rises or spending cuts at very little notice to ensure it is met”.
In its latest Inflation Report last month the Bank of England cut its 2016 GDP forecast from 2.5 per cent to 2.2 per cent and its 2017 forecast from 2.7 per cent to 2.4 per cent. It also slashed its forecast for average wage growth for those two years. Wage growth is a crucial metric for determining tax revenues due to the amount of cash that flows in from income tax and National Insurance. The Chancellor has also made promises to raise the higher rate income tax threshold by 2020, which will cost around £8bn. Other forecasters, including the Bank of England and the OECD, have been slashing their UK growth predictions in recent months in the face of the slowing global economy. The Government is on course to miss its 2015-16 deficit target of £73.5bn by around £6bn.
The IFS estimated earlier this month that if average earnings rise by 1 per cent less by 2019-20 than estimated by the OBR in November it would cost £5bn in income tax and NI revenues. The IFS also warned that the sharp fall in the stock market this year was set to cost the Treasury £2bn in lower capital tax receipts. In its “Green Budget” earlier this month, the IFS warned that tax revenues are “volatile and uncertain”. Its director, Paul Johnson, said: “How he responds to any further unpleasant fiscal surprises may, more than anything we have seen, come to define his period as Chancellor.”
In November’s Spending Review the Chancellor mandated real terms cuts in total day to day departmental spending of £10 by 2019-20. This was down on the £18bn of cuts outlined in the July Budget. But it would still have taken spending on public services other than health down to its lowest level as a fraction of national income since the 1940s, according to the IFS. The Chancellor is also taking around £12bn out of the welfare budget by the end of the decade by squeezing tax credit payments. Mr Osborne used an unexpected £27bn upward revision to expected taxes over the five years to 2019-20 in the Spending Review last year to ease the scale of his planned cuts to public services and still hit his surplus target. 
In his interview yesterday the Chancellor said: “The first place I look to [for more cuts] is further efficiencies in Government. There are always ways to make government better, always ways to make sure that the taxes of people are better spent. We’ve shown you can deliver more bang for your buck, and we can deliver value for money for the taxpayer while improving government services”. In its latest Inflation Report last month the Bank of England cut its 2016 GDP forecast from 2.5 to 2.2 per cent and its 2017 forecast from 2.7 to 2.4 per cent. It also slashed its forecast for average wage growth for those two years. Wage growth is a crucial metric for determining tax revenues due to the cash from income tax and national insurance. The Chancellor has also made promises to raise the higher-rate income tax threshold by 2020, which will cost around £8bn.
The latest nominal GDP numbers released by the Office for National Statistics this week showed the cash size of the economy in 2015 was smaller than previously projected by the OBR.  The IFS has estimated that if average earnings rise by 1 per cent less by 2019-20 than estimated by the OBR it would cost £5bn in income tax and NI revenues. The IFS also warned that the sharp fall in the stock market this year was set to cost the Treasury £2bn in lower capital tax receipts.
In November’s Spending Review the Chancellor mandated real-terms cuts in day-to-day departmental spending of £10bn by 2019-20. This was down on the £18bn of cuts outlined in the July Budget. But it would still have taken spending on public services other than health down to its lowest level as a fraction of national income since the 1940s, according to the IFS. Mr Osborne is also taking around £12bn out of the welfare budget by the end of the decade by squeezing tax credit payments.