Budget 2015: have the public finances been saved?

The chancellor, George Osborne, devoted a large part of his final budget before the election to projections that the deficit will fall. So has austerity really worked, or are the public finances still in a mess? Matthew Partridge investigates.

What happened in the Budget?

In today's Budget, George Osborne touted new deficit projections from the Office of Budget Responsibility to bolster his claim that the government is "fixing the roof" on the deficit (the amount the government spends each year over and above what it raises in taxes).

He pointed out that under the revised estimates, net public debt (the overall national debt) as a percentage of GDP will peak at 80.4% this year a year earlier than expected. That falls slightly to 80.2% in 2015/16. In November's autumn statement, the projections were a little worse, at 80.4% for 2014/15 and 81.1% in 2015/16.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Obsorne claimed that as a result, "the original debt target I set out in my first Budget has been met" since "we will end this parliament with Britain's national debt share falling". He even boasted that, "we'll have paid off the debts incurred in the South Sea Bubble, the First World War, the debt issued by Henry Pelham, George Goschen and William Gladstone".

Is this correct?

In absolute terms, total net national debt is expected to keep rising from £1,479m in 2014-15 to a peak of £1,617m by 2018/19. This is nearly double the level of £771.5m seen in 2009-10. However, since most economists (and the original target) measure national debt in relation to GDP, it's fair to say that he has met that goal, as GDP is rising faster than the deficit.

However, this is partly due to the sudden energy-related fall in inflation, which has shaved nearly £3bn off government debt payments on index-linked bonds. Were inflation to rise again, this effect could easily reverse itself. It also assumes that the government will be able to save' more money from welfare spending. Vicky Redwood of Capital Economics notes that interest rates need to remain low for this target to be met.

Time for Osborne to crack open the champagne?

Not quite. Unsurprisingly, there was no mention in Osborne's speech that the government has still missed the other original target which was to eliminate the deficit altogether by 2015/16.

Even if you use the most generous measure of the deficit, which adjusts for the business cycle and excludes investment, the budget will still not move into surplus until 2017/18. And adding in investment puts it back a further year to 2018/19.

Although it sounds good as a sound bite, Osborne's line about repaying ancient debts is also misleading. What's happened is that the government has used new borrowing to roll over past debts. This means that they still exist, although the lower interest rates of the new debt means that the taxpayer should save money.

How will it play out politically?

With the election less than two months away, the big question is whether the budget swayed any voters. Of course, we won't know until the big day. But in terms of the pundits certainly, views on the budget did not fall along simplistic party lines.

The Spectator's Fraser Nelson a natural Conservative supporter points out that Osborne's borrowing figures are still much higher than the plans put forward by Alistair Darling before the 2010 election, which Osborne once mocked as fiscally irresponsible. Fraser also notes that Osborne is still planning "incrediblysharp" cuts after the election.

However, Matthew d'Ancona, writing for The Guardian, argues that, "the texture of this speech, the audacity of its hope", mattered more than any of its component parts.

Anoosh Chakelian of the left-leaning New Statesman agrees while Labour leader Ed Miliband "delivered a strong response" to the speech, his core message of missed targets and future austerity "paints too gloomy a picture to obscure the Chancellor's vision of sunshine".