14 Jun 2010

New economic forecast brings unexpected problems for coalition

The OBR experts have just released their analysis. Here is my instant take.

This is not a mandate for a much sharper axe.

Projected economic growth has been downgraded by about half a per cent in each of the coming years, suggesting that the independent experts believe that the Labour government painted a rosy picture of the economy.

The Office of Budget Responsibility has also downgraded the economy’s “trend rate” of growth to 2.1 per cent, by 2014-15.

But the real revelation here is that all of these effects, that would be expected to make the deficit worse, have been far outweighed by the improvement in economic conditions fostered by the previous government.

Overall expectations of government borrowing are markedly less now than at Alistair Darling’s last budget in March.In fact the difference between the March 2010 forecasts and these ones is £32.4bn less borrowing by 2014-15.

This is the effect of better tax receipts and lower unemployment benefits washing through the next few years, and the OBR experts removing very cautious assumptions made by Mr Darling.

Net borrowing will now drop to less than 4 per cent of GDP by 2015. The OBR itself says: “These improvements are driven by the expected recovery of the economy over this period and by the policy measures announced by the previous government to reduce the deficit.”

Mr Osborne’s favourite measure though is the “structural deficit”. Because trend growth is smaller, the OBR forecasts that the structural deficit will be higher (though only just by 0.3 per cent).

Clearly there are two ways to look at this: the deficit is beginning to sort itself out, and it is time to make the already implied degree of cuts more credible (Labour’s position). Or the economy is strong enough to warrant an even more savage axe (the Conservatives).

For example, the OBR has shown that “the bulk of the structural deficit” (Mr Osborne’s election aim) is already being eliminated under existing plans, going from 8.8 per cent this year to 2.8 per cent in 2015.

I’m not sure this justifies a change of course on raising taxes, for example. It also strengthens the hand of the more dovish elements of the coalition.

The good news for Mr Osborne is that the improvement in the deficit numbers may obviate the need for an unpopular VAT rise. The bad news is it turns down the temperature a little on the need for a much faster rate of deficit reduction.

The independent budget experts have unexpectedly presented the chancellor with some problems.

5 reader comments

  1. CharlesJ says:

    So the OBR has simply used a different set of unsubstantiated and politically motivated assumptions (conciously or unconciously) than the previous government.

    Making them independent from the government, does not make them independent from their own political assumptions, nor independent from their potential career prospects if they adopt the neo-liberal line.

    1. Sue Marsh says:

      Exactly – Budd’s not exactly an economic leftie.

  2. Meg Howarth says:

    Faisal, do read responses to Jon’s earlier ‘Thanks, Banks, Really’ blog. Several mention the debt-based economy which is at the root of the current financial mess. I’m sure we’d all appreciate your writing on the urgent need for monetary reform and fair taxes.

    However justified and necessary Robin Hood taxes – if only to help appease simmering public anger at bank bonuses and profits – it’s the system that requires fundamental change, not the symptoms only that need to be tackled.

    We must use every means possible ti let this two-in-a-single-bed goverment know the public isn’t economically illiterate, that we’re not conned by the ‘consultation’ on cuts, that we demand public discussion on the whole economic shebang, inlcuding an alternative to the continuous unsustainable growth model of corporate capitalism, and on fair taxes – spoken of by every party plus the saintly Vince in the run-up to the election.
    Not everyone is averse to paying taxes as long as they’re fair and paid by all. We know that social goods and services require funding. The failure to discuss land tax (LVT) – because it would bring down property prices – a social good – is a scandal. (cont).

    1. Meg Howarth says:

      (cont from above)
      In my opinion, LVT has the following principal benefits over any other tax: it would bring down property prices and so help moderate the boom/bust cycle, thereby helping to reduce wealth inequality, so much of which results from property holdings. NB: last night’s C4 Dispatches presented by Will Hutton indicated that no less than 75% of the banks’ lending during one year was for ‘mortgage credit’ and other speculative non-productive reasons. The amount that LVT could raise is currently unquantified but likely to be substantial. It would also be easier to collect and difficult to avoid as land can’t be hidden.

      Adrian has previously raised, amongst other important issues of detail, the matter of landlords passing on LVT in increased rents (a question which assumes the inevitablity of the landlord class). The substantial fall in property prices that would result from LVT as landowners/lords found it unprofitable to keep land and property out of circulation would itself help to reduce rents.

      But the fundamental economic issue of the momentAn important question but one which shouldn’t be confused with how to stop the boom and bust cycle.

    2. Meg Howarth says:

      Sorry, all. Last sentence of second posting above should read: ‘An important question but one which shouldn’t be confused with he fundamental economic issue of the moment: how to stop the boom/bust cycle’.
      Boom/bust isn’t inevitable. It’s answer largely lies, surely, in monetary reform, taking control of the money supply away from the private banks and putting in the hands of government where it belongs, to be used for social benefit not, as at present with the banks’ control of same, for bonuses and profits.

      I share another poster’s outraged feelings re the ‘carrion classes’, ie banks and financial institutions – and, I’d add, landlords, buy-to-let ones in particular. But taxes on profits/bonuses won’t be enough to stop their insatiable greed. Only taking their hands off the controls can do that – in this case, control of the money-supply.

      This is what we need to be telling the Treasury, alongside a demand for fair taxation. It needs to know we’re not concerned with symptoms only but causes. In my area, a group of non-party political residents is already discussing economic reform.

      Meantime, the http://www.call4reform.org.uk webpage comes highly recommended.

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