In his 29 November Autumn Statement George Osborne announced some imaginative measures to boost growth in the medium-term, most notably a ‘credit easing’ plan aimed at firms with a turnover of up to £50m and a £30bn infrastructure plan using both public and private funds. There were also some interesting tax changes in the detail. The big picture, however, was of an economy struggling to grow and highly dependent on events in Europe. Borrowing was revised comprehensively higher. The Chancellor wanted to get rid of the budget deficit this parliament. He will not now do so.
A month ago I wrote that the 29 November Autumn Statement was George Osborne’s big test. Did he get through it? That depends on the way you care to judge it, and developments over the next few months, particularly in Europe.
Perhaps the Chancellor had reason to be grateful for the fact that there was already so much gloom around when he stood up in the House of Commons to present a new set of economic and fiscal forecasts, as drawn up by his independent Office for Budget Responsibility. Everybody expected it to be downbeat: the question was one of degrees of grimness. I shall return to that in a moment.
Everybody also knew, thanks to some energetic pre-briefing by HM Treasury officials and advisers, that there would also be a set of growth measures, intended as Osborne put it ‘to build the foundations for future growth’.
The surprises
Given that the fiscal cupboard was pretty bare, these measures were quite imaginative even if, as I say, there were few surprises on the day. They included:
Slower growth and a loss of productive potential ...
So, what the Chancellor announced was quite imaginative and some clever new incentives for angel-type investments. The aim is to prepare Britain for the growth upturn when it comes.
The question is when that might be. For the big picture in the Autumn Statement was a gloomy one, and it went beyond mere growth revisions, though they were unwelcome. In four respects the Office for Budget Responsibility's had bad news for the Chancellor and, by extension, the rest of us.
Growth in 2011 will be just 0.9%, compared with 1.7% in its March forecast, slowing further to only 0.7% in 2012, down from 2.5%. GDP is declining by 0.1% this quarter, rising 0.1% in the first quarter of next year but remaining subdued through 2012.
The economy's productive potential is less than it was, meaning it will be 3.5% smaller in 2016 than the OBR thought in March. Every 1% of GDP is about £15bn, so that adds up to quite a lot of lost output. In total, according to the official forecaster, the economy will be 13% smaller in 2016 than if the Treasury's spring 2008 forecast had been right.
Borrowing
Slower growth and a loss of productive potential have direct knock-on effects for borrowing. Public borrowing was revised up every year by the OBR, from £122bn to £127bn this year (8.4% of GDP), and from £29bn (1.5% of GDP) to £53bn (2.9% of GDP) in 2015/16.
Not only that but, because more of the budget deficit is now thought to be structural rather than cyclical, Osborne only meets his fiscal target in 2016/17 – eliminating the current structural budget deficit, two years later than in March, and only does so by extending the squeeze on public spending until 2016/17; beyond the next election. He has pledged to cut it by 0.9% in real terms in both 2015/16 and 2016/17. To the extent that the crisis was preceded by the longest spending boom in history, we are now in a reverse that lasts almost as long.
If one wanted to pick out a few things to highlight the grim picture, how about the fact that this year’s 2.3% fall in real household incomes is the biggest in the post-war era, and will be followed by a further smaller fall (0.3%) this year.
There will be 710,000 public sector job losses by 2017 according to the OBR, compared with a projection of 400,000 to 2016 in March.
Did Osborne pass his test?
It depends how tough you are as a marker. Only by rolling his fiscal target forward to 2016/17 does the Chancellor meet it. The original aim was to eliminate the structural budget deficit in this parliament. That will not now be achieved. These rolling targets are a moveable feast, as we discovered under Gordon Brown.
It is, of course, ridiculous to compare the pre-budget projections the OBR made in June 2010 with these latest numbers. Alistair Darling did his best in difficult circumstances from 2007 to 2010 and would have liked to have done a pre-election comprehensive spending review. He was not, however, allowed to, so his ‘plans’ were merely a sketch. He too, had he remained in office, would have been affected by highly unfavourable headwinds.
We cannot know precisely what would have happened to debt and the deficit under Labour – it is possible a fiscal crisis would have forced even greater austerity. In the absence of that, however, borrowing would have been higher, Osborne, using Treasury (not OBR) calculations said cumulative borrowing would have been £100bn higher under Labour.
That will not, of course, settle the ‘Plan A/Plan B’ debate. One result of the Autumn Statement is that it will run to, and probably now beyond, the next election.
An age of uncertainty
This is a time, of course, of unusual uncertainty. On the eve of the Autumn Statement, the Paris-based Organisation for Economic Co-operation and Development published its twice-year Economic Outlook. Though reported as predicting a return to recession for Britain, its forecast was for a flat final quarter, followed by a tiny downturn in the first quarter of 2012.
This is margin of error territory. It could be that Britain meets the recession definition of two quarters of falling gross domestic product, or it could be that it does not. The only thing we can say with confidence is that it is hard to predict.
‘More than usual, world economic prospects depend on events, the nature and timing of which are highly uncertain,’ said Pier Carlo Padoan, the OECD’s chief economist.
‘Above all, confidence has dropped sharply as scepticism has grown that euro area policy makers can deal effectively with the key challenges they face. Serious downside risks remain in the euro area, linked to the possibility of a sovereign default and its cross-border effects on creditors, and loss of confidence in sovereign debt markets and the monetary union itself.’
Amid this huge uncertainty and when the public finances are undergoing long-run repair, the onus is on monetary policy, as well as the Chancellor’s growth strategy for the medium and long-term, to provide any impetus.
Quantitative easing and interest rates
The OECD, in its forecast, said it expected the Bank of England to add to the amount of so-called quantitative easing (QE) – electronically creating money by purchasing financial assets, overwhelmingly in the form of UK government bonds, gilts.
In 2009 the Bank undertook purchases of £200bn, announcing a further £75bn in October. The OECD expects the total to rise to £400bn (from £275bn so far announced) in the early part of 2012.
Such purchases will help keep gilt yields near their current record lows. And, because QE is what central banks do when they cannot cut interest rates any further, it is likely to extend the period of record low interest rates.
Economists at Citigroup, in a new global economic forecast, put it this way: ‘The UK is likely to expand QE aggressively. We expect a long period of ultra-low nominal rates (and negative real rates) in major industrial countries, with the first rate hike forecast for 2014 in the US, 2015 in the UK and 2016 in the Euro Area.’
So anybody who is comforted by very low interest rates will be pleased. This will be the longest period of unchanged rates for decades, and at record low levels.
Perhaps, however, we should also bear in mind Sir Mervyn King’s recent observation. The Bank of England governor said higher interest rates would be good news, because they would demonstrate that the economy was strong enough to take them. We may have to wait some time for that.
David Smith, Economics Editor, The Sunday Times
