When we assess the Osborne borrowing record, let’s be clear that it’s not just headline borrowing that is much higher than he promised a couple of years ago. Buried in today’s budget is also the hidden borrowing of future pension promises where he’s already spent some of the money designed to pay for them.
Much of the discussion about today’s budget will focus, rightly, on the lack of growth in the economy and whether Osborne has done anything to address this.
However, listening to him deliver the speech, it was clear he was hoping for positive headlines for some of his tax reductions: the increase in the personal allowance to £10,000, increased tax relief for childcare, and his new national insurance employment allowance.
What his speech didn’t reveal is how he’s paying for these. But buried in the budget documents is the table of numbers that reveals all.
In January the government announced major state pension changes that will mean many people (employees who are ‘contracted-out’ of the State Second Pension) will pay higher national insurance contributions today in return for a slightly higher state pension in the future. This change is supposed to save money in the long-run by reducing our projected state pension bill from 8.5 per cent of GDP in 2060 to 8.1 per cent.
But in the short-term, the exchequer collects higher national insurance contributions whilst the increased state pension payments take many years to build up. So these pension changes have the effect of making the public finances look better in the short-term but, crucially, we’ll need that money to pay for higher state pension payments in the future.
Yet where did Osborne get the cash for today’s tax sweeteners? Yes, that’s right: from these higher national insurance contributions – some £5.5 billion by 2016/17.
So Osborne is spending the money we need for future pension payments on tax give-aways today, but claiming it’s all fiscally neutral. It’s only fiscally neutral if these tax changes get reversed before the higher pension payments start to kick in.
This looks like an example of creative accounting – recycling money from the future to pay for a tax give-away today. Some might say that’s the same thing as borrowing. Well, yes indeed. The only difference is that the future pension liabilities don’t show up in the government’s balance sheet so it doesn’t have to be declared as borrowing.
So when we assess the Osborne borrowing record, let’s be clear that it’s not just headline borrowing that is much higher than he promised a couple of years ago. Buried in today’s budget is also the hidden borrowing of future pension promises where he’s already spent some of the money designed to pay for them.
Leave a Reply