Mr Osborne’s Conjuring Trick

Back in July I wrote a piece on Mr Osborne’s budget (Mr Osborne’s Brave New World) in which I praised him for his courage and vision in taking an axe to our out-of-control welfare state. He was a man with a plan. He was going to make structural reforms that would raise wages and reduce welfare. I sang his praises because, at last, a political leader had mapped a way out of the financial black hole into which we had fallen.

After the Autumn Statement which Mr Osborne delivered to the House of Commons on 25 November, I take it all back. Mr Osborne has turned out to be just…a politician. Though a master of his trade.

Yesterday I spent the early evening in the company of The Spectator magazine’s top brass. Veteran journalist and broadcaster Andrew Neil presided; Fraser Nelson (Editor) explained; James Forsyth (Political Editor) analysed; and Marvin Rust (Head of tax at FTI Consulting) probed.

Now Andrew Neil, as many readers will know, is not just a pretty face. He has an encyclopaedic knowledge of British politics and is a pretty competent economist. His take on events is always insightful.

Andrew thinks that Mr Osborne’s strategy was always to take the Tories to the middle ground. Apparently, he spent much of the election campaign pouring over the Labour manifesto, looking for ideas. Since the election, however, the political landscape has changed completely, thanks to the arrival of Mr Corbyn who is now dragging Labour (somewhat reluctantly in the case of its MPs) to the left. The centre ground is now open for the Tories to occupy for the foreseeable future.

Mr Osborne realised that the Tories could not be the People’s Party if he took £4.5 billion out of the pockets of the low-paid. He therefore undertook the biggest political U-turn of modern times and scrapped the proposed reductions in Tax Credits altogether. Moreover, given the heightened dangers to national security posed by Islamist terrorism, the police were spared the chop too. Even the Army has got some more cash.

This remarkable reversal of expectations, which many commentators have dubbed the end of austerity was made possible because the quasi-autonomous Office of Budget Responsibility (OBR) has raised its forecast for tax receipts over the next five years. Further, it has reduced its estimate for interest payments on the national debt in view of the prospect of continued super-low interest rates. Mr Osborne has suddenly found £27 billion (a cumulative figure over five years, please note) down the back of the proverbial sofa.

Of course, he has also raised taxes. Most notably, the Apprenticeship Levy – a 0.5% charge on large employers’ payrolls – will bring in about £3 billion a year. Higher stamp duty on second homes and buy-to-let properties will yield something similar.

Overall, the British economy seems to be in a sweet spot. Growth is continuing at a clip of just under 3%. Although Britain’s growth is likely to be exceeded by America’s this year, the UK has topped the G-7 growth league for three years running now. Inflation is zero. Interest rates remain at rock bottom. The Pound is strong. Employment is at record levels, and job creation continues apace. In fact, over the last three years, the UK has created more jobs than the rest of the European Union put together. No wonder Europeans are flocking here by the hundreds of thousands each year.

Fraser Nelson pointed out that the current debate about municipal devolution – the Northern Powerhouse, and all that – will have important fiscal implications. The new elected mayors in the big northern cities will have to have tax-raising powers. Already, in the Autumn Statement, Mr Osborne has signalled that Council Tax will have to rise in many parts of England.

Some of Mr Osborne’s spending plans seem, in the eyes of many right-of-centre observers, downright odd. By 2018 the Department for International Development (DIFID) will have a larger budget that the Home Office. And, although the Army and Navy are to get some very shiny new kit, troop numbers will stay at their current low level of 70-80,000. (We had 650,000 soldiers in our Army in 1950!) The benefits bill, overall, is still set to rise; so the Welfare State is still, in my view, out of control.

But Fraser’s key point was that, contrary to what the Corbynistas argue, inequality in the UK is actually falling, as the tax burden has been skewed to the rich and most low-paid workers pay no or little tax.

James Forsyth argued that the Paris atrocities of 13 November have completely changed the political mood. On that evening, the French mobilised more police in their capital than we have in all the combined police forces of the entire UK. National security is now uppermost in mind and Mr Corbyn’s instinctive pacifism is out-of-step with mainstream opinion. For the moment at least, the Tories do not have an opposition.

Marvin Rust reflected that during Mr Osborne’s five-and-a-half years in Number 11 Downing Street, the UK Tax Code has grown even more voluminous than before. There is now no single top tax consultant who understands the complete gamut of the tax system. This is unhealthy. Further, companies which employ large numbers of lower-paid workers are now going to be hit by the double whammy of the Living Wage and the payroll-based Apprenticeship Levy. This will hit the bottom line for the likes of Tesco et al.

Will the Chancellor succeed in eliminating the deficit by 2019-20? The consensus view was that it’s still possible – if the benign environment continues.

What could possibly go wrong? The panel identified three main concerns. The first is the global economy. A major economic crisis in China could be contagious. The second is that the forthcoming leadership struggle within the Tory Party could be destabilising. But the main concern is the EU referendum, which is supposed to take place before the end of 2017. This throws up a number of high-risk scenarios which I’ll be discussing in detail in the December edition of the Master Investor magazine.

When Mr Osborne’s Little Red Book is finally published, its first epithet will read: Always find yourself on the side of the winners.