Deloitte Monday Briefing: Mr Osborne’s Twenty-Year Vision

A personal take on economics from Ian Stewart, Deloitte's Chief Economist in the UK.

Most of the media attention around UK Budgets focuses on the winners and losers. For the Chancellor it was a Budget for makers, doers and savers. The FT's Martin Wolf described it in less complementary terms, as a Budget for "the prosperous and the elderly". Stepping away from the personal finance aspects, what does the Budget tell us about the Chancellor's long-term vision for taxation, public debt and public spending? Last week, Mr Osborne announced the biggest upgrades to UK GDP growth forecasts between budgets in at least 30 years. But while the economy may be on the mend, the government is still borrowing over £100 billion a year, equivalent to almost 7% of GDP. Mr Osborne's message was that public sector austerity has much further to run. The UK is less than half way through a nine-year programme to repair the government's finances. About half of all the cuts in public spending needed to eliminate the deficit will take place in the next Parliament. While the public sector squeeze continues, the private sector seems to be on the verge of a period of sustained growth. The independent forecasting body, the Office for Budget Responsibility (OBR), forecasts that business investment will rise by almost 50% over the next five years. It also foresees a recovery in consumer spending power. By the time of next May's General Election the OBR expects earnings, after allowing for inflation, to be growing at the fastest rate in seven years. The Budget offers intriguing hints about the Conservatives' long-term ambitions. The Budget Red Book makes the case for a 20-year programme to reduce government debt to meet the costs of an ageing population and as an insurance against future uncertainty. A chart in the Red Book hints at the scale of Mr Osborne's ambition. It shows the stock of net public sector debt to GDP shrinking from almost 80% today to 30% by the mid-2030s - close to the lowest level in 300 years. To achieve this feat of debt reduction would require a 20-year period of fiscal conservatism unparalleled in recent history. In 35 of the last 40 years the UK government has spent more than it has raised and has borrowed to fund the difference. To shrink the ratio of debt to GDP to 30% would require budget surpluses to become the norm. To achieve this would require tremendous political will backed by sustained economic growth. One small part of the proposed...