5 Dec 2012

Osborne peers over the edge of Britain’s fiscal trench

Lucky chancellor. It could have been far worse for him had he not miraculously gained…

1. The “£3.5bn” proceeds of an uncertain 4G auction sale, (because the OBR was assured the cash would arrive before April) 2. The £5bn proceeds from a Swiss tax deal that Robert Chote told me could yet be subject to a Swiss referendum and 3. A £50bn flattering of the public finances from the proceeds of profits from the Bank of England’s quantitative easing.

2. Luckier chancellor. It could have been yet worse, had the OBR not decided to completely change its assessment of the underlying dynamics of the economy, its speed limit, with an entirely new smaller estimate for the output gap, described here: So would a demand stimulus work?

3. But make no mistake, this fiscal statement was drenched in red ink, it’s just that some of it had been rendered invisible by special one off factors. Headline figures of £50bn extra borrowing over six years.. Strip out the one-off windfalls from QE and Royal Mail pensions and it was £106bn.

4. Debt will reach £1.5 trillion in 2018. Mr Osborne has missed his “supplementary” debt target. It stays though, and will continue to be assessed. It would take some sort of privatisation miracle sell-off of banks, road, railways etc, and a boom, and the end of the euro crisis to get back on track. Formally it was missed by £17bn. Stripping out the one-off factors it was missed by £34bn.

5. Robert Chote at the IFS provides some cover for the chancellor by stating that the cause of the slowdown wasexplained for by esternal factors, not the impact of austerity.

6. Goodbye AAA.

It’s almost certainly gone next year. Fitch already has UK on negative watch, issued this statement saying that missing the target weakened UK credibility. Not great for George Osborne. This might be helpful, more generally though.

7. Having said all that, the cuts start in earnest from next year, and now we know that they will last at least a half decade. Britain is facing its won fiscal cliff that will drag on growth, except it is deeper and longer than America’s. Call it a fiscal trench.

8. The pain was spread regressively, apart from the richest ten per cent. Poorest are hit by the three year real terms benefit and credits cut.

9. Business will welcome corporation tax cut and the massive increase in plant and machinery allowances. But very little on a business bank. The direct infrastructure investment increases are an admission that they didn’t get the first deficit plan right. However the overall boost to growth is an immaterial 0.1-0.2 per cent.

10. An increasing amount of the deficit plan is being pushed into the next parliament. This is now bringing the Osborne plan pretty close to the vague contours of the Darling plan. I called this Osballism last year.

11. It’s untenable for Labour to continue not to offer any numbers. Even on a basic point: would Labour match the coalition’s now higher path for public investment spending? Rachel Reeves could not offer anything on this. Osborne started at least to flesh things out at this stage of his shadow chancellorship.

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