The Chancellor appears to have performed a conjuring trick. He announced an additional £5.4 billion of infrastructure investment  in 2013-14 and 2014-15 while foregoing £4.0 billion of tax receipts in 2014-15, by cancelling / postponing fuel duty rises, raising the personal allowance, temporarily boosting investment allowances and cutting corporation tax. Yet the Office for Budget Responsibility (OBR) judges that, despite these giveaways and a weak economy, he is on course to meet his “fiscal mandate” of returning the cyclically-adjusted current budget (CACB) to balance one year earlier than the five-year requirement (i.e. in 2016-17 rather than 2017-18).

What explains the magic? The Chancellor announced further cuts to departmental and welfare spending but these were required to meet his previous assumptions for “total managed expenditure” through 2016-17. He paid for his giveaways partly by a further tax raid on banks and higher-earners – uprating the higher rate threshold by only 1% per annum coupled with restricted pension relief and a hike in the bank levy raise £2.7 billion by 2016-17. The larger part of the bill, however, was met by banking a number of windfalls – QE income, the operating surplus of Bradford & Bingley / Northern Rock Asset Management, tax “repatriation” from Switzerland and, in 2012-13, the 4G spectrum sale. The first two more than account for the forecast CACB surplus of 0.4% of GDP in 2016-17.

The OBR, in addition, has been less brutal than it might have been in assessing the Chancellor’s plans, judging that most of this year’s economic weakness is cyclical (i.e. temporary) rather than structural, despite contrary evidence from its own “cyclical indicators” approach. The OBR has, admittedly, further reduced its assumption for future potential growth, which hits the CACB by 0.9% of GDP by the end of the forecast period. Its projections for potential output, however, remain at the optimistic end of the range of external forecasts, while “other forecasting changes” improve the CACB by 0.3% of GDP relative to the March forecast. The OBR also assumes that future losses on the QE programme will be covered by capital grants so will not affect the current budget balance.

The larger fiscal picture is little changed by this Statement. Deficit reduction has been modest less because of economic weakness than because the ratio of current spending to GDP has yet to be cut significantly – the OBR projects the share at 42.3% of GDP in 2012-13 versus a 2009-10 peak of 42.9%. The Chancellor’s plans imply a whopping 5.4 percentage point fall in this share over the next five years – see chart. This is far from unachievable – the Thatcher Government managed a larger reduction between 1984-85 and 1989-90, albeit with the tailwind of a strong economy – but the task has barely begun.