3 Dec 2014

Autumn statement: Osborne’s promises and reality – my analysis

George Osborne told parliament today the government’s deficit is approaching zero.

The economy rapidly bounced back from the credit crunch and the Eurocrisis. By slashing back the state the Chancellor opened up new space for the private sector.

Britain has “rebalanced” – with most growth coming from exports, business investment and a soaring manufacturing sector. The money-printing operation at the Bank of England is, as with America, being wound down. RBS is set to be sold off as a thriving, global investment bank.

To mark this triumphant day, a squadron of Gloucester Old Spots flew in V-formation above 11 Downing Street…

This, of course, is in a parallel universe. Had Osborne’s 2010 predictions actually happened, the deficit would be small, the debt falling, and the much vaunted rebalancing of the economy would have taken place.

But it hasn’t – and today Osborne had to spell out the consequences. His two targets were to eliminate the deficit and to get debt falling by the last year of the parliament.

The deficit is £75bn and the debt – at 80.1 per cent of GDP – is still rising and will not peak until next year. Though tax receipts are lagging behind the strong recovery, welfare payments are also lower – and it was this it seems (I write before I dive into the documents) that avoided the deficit actually rising.

The public finances will not be in surplus until 2018  – and only then with £12bn worth of welfare cuts and £15bn of spending via departments.

All this counts as a failure, no matter how many tunnels you promise to dig beneath Stonehenge.

Why did it happen?

The confluence of external and internal problems. The Eurozone teetered on the edge of collapse for two years and even now is stagnant; absent external demand in  Europe, Britain’s export industries did switch towards the wider world, but starting form a low base, it was hard to achieve takeoff.

The “march of the makers” that Osborne promised still leaves manufacturing 4 per cent smaller than it was in 2008.

Internally, quantitative easing took years to filter through into real demand – and then only when the Treasury overcame the objections of the Bank of England and started plugging money direct to the banking sector and the housing market.

Finally, when the recovery took off, it created hundreds of thousands of low paid and self employed jobs.

So people aren’t spending and they aren’t paying loads of tax either, leaving growth on the long-term life support machine of free money from Mark Carney.

George Osborne speaking in May 2010

Osborne deserves credit for understanding that, had he pursued his aggressive austerity targets as planned, it would have tipped the economy into multiple dip recessions. So he has in the end borrowed more than Labour borrowed in 13 years in office, and more than Alistair Darling planned to borrow in 2010.

He also deserves credit for understanding that, if you want cheap and easy growth in Britain, you don’t go trying to re-engineer the economy at the same time. This is growth in the service sector, fuelled by bank credit and rising house prices and interest rate cuts. That is, it’s the same lopsided growth we’ve always had.

The cuts spelled out today will last right through the next parliament – should it go the whole five years. But of course the detail of the cuts – and potential tax increases – were not spelled out.

Both the Coalition and Labour are wedded to similar overall spending packages (Labour’s weaker by an estimated £15-20bn because they allow themselves to take a whole parliament to balance the books).

Yet neither side can bring themselves to explain  – after ring-fencing health, education, aid and pensions – where the pain will happen.

As Bloomberg economist Jamie Murray has pointed out, it means that by 2018 the money spent on all non-ringfenced departments will have been cut by 60 per cent in 10 years.

The government’s move to legislate a definite end date to the deficit is, in this context, meaningless.

In Germany there is a balanced budget law that prevents that country expanding its public spending to offset catastrophic unemployment and deflation in southern Europe. Now, on top of that, Britain, the fourth largest economy in the world, will also legislate for a balanced budget.

Rising despair

The only way major countries in a trading bloc can all simultaneously be forced to balance their budgets is if their central banks go on printing money forever and interest rates remain at deflationary levels.

Across politics – both on the left and right – there is a rising meme of despair: people don’t come into politics to balance a country’s books. They come to improve things – whether it be the export performance of British industry or the living standards of poor people.

The levels of paralysis implied in the inability to shrink health, education and aid, and the compulsory collapse of the rest of the public sector, is felt on all sides of politics.

As for the electorate, it is now faced with mainstream parties who will do their utmost to avoid giving any detail as to how they will do the austerity they signed up to today.

If we had a law that said: balance the books by year X, and at all times spell out the exact cuts and tax rises you need to do it, that would be closer to democracy.

But the economic challenge for Britain no longer revolves just around the defict and the debt.

Scotland’s close rejection of independence has unleashed a story of fiscal devolution. The possibility that Britain will leave the EU after a referendum is creating major uncertainties for investors. And there is our perennial inability to decide what kind of infrastructure and energy system we want, which again makes long-term inward investment decisions hard to do.

The final thing, for any long-term balance sheet of George Osborne’s time as Chancellor, is to recognise how the world has changed.

In 2010 the clear and present danger was of a bond market crisis and the collapse of the Euro, which would have destroyed the British banking system.

Today we’re still haunted by the threat of stagnation and slowdown in Europe and Asia, but we have war in Ukraine, economic sanctions between the West and Russia, and a region-wide descent into hell in the Middle East, with a rising threat of extremist violence here that is better understood in Whitehall than it is on the streets of Britain.

Being chancellor is no longer the most challenging job in government.

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