IFS Green Budget: Don’t spend your £3bn windfall Mr Osborne, but do come up with a Plan B (and C and D)

The main finding of the Institute for Fiscal Studies annual alternative fiscal health check is that tax revenues are more buoyant than the Government had expected even in November. This is despite the contraction in the economy announced last week.

The Green Budget puts this down to £1.5bn extra in income tax and national insurance each. The biggest factor is the extra salaries paid to bankers to “compensate” for their lower bonuses.

All sorts of interest groups are lining up to spend this on cheaper fuel, scrapping tax for rich people, raising the personal allowance by £500, measures to boost industrial growth etc. The politics of this are clear: the Green Budget suggests a possible fall in average real disposable income this year.

There was an even bigger “windfall” last year for Chancellor Darling as a result of unemployment being far lower than forecast at the PBR. Of course this was not really a windfall, it was and is a marginally smaller mountain of annual borrowing.

The risks identified to the austerity plan are really rather sobering. Almost all the growth risks are in the direction of lower growth. Then whatever the level of growth there is a fear that it will be less tax-rich. A rebalanced economy with more manufacturing and less consumption raises less tax. Lastly, it is still unclear whether the epic spending cuts announced are actually deliverable.

My sense is that the Chancellor will not follow this advice, even though he’d agree with the rationale. The political pressure arising from the poor GDP figure, a pugnacious Shadow Treasury, a substantial poll deficit, a coalition minister suggesting direct action against her own government, and the odd riot is such that we will surely get some sort of policy in March dressed up as “supporting hard working people and the economy”. That certainly was the impression I was left with interviewing the Chancellor on Friday.

Equally, he will also want to pull off this trick without actually changing his austerity plan.

Happily the IFS has come up with a clever idea to spare his blushes, and to inject flexibility into fiscal austerity without abandoning in it and, as he told me: “sending us back to the fiscal danger zone”.

The Chancellor could claim to stick utterly to his central fiscal plan, but announce upside and downside contingency plans. He could preannounce that if growth is significantly slower, he could slow the cuts and the tax rises. And you mitigate the market impact by saying of growth is higher than expected, you go even faster. It has to be symmetrical. Some might call it a Plan B others call it a “contingent policy tightening”

As the Barclays Capital team who put the Green Budget macro forecasts together suggest: “a Plan B is not a sign of weakness or defeat it is sensible planning”.