The grim state of the UK economy is not all George Osborne’s doing, but he may not be smiling on Wednesday
BARELY four days to go to the Chancellor’s Autumn Statement and I have now detected yet another missing icon on my computer keyboard. Readers will recall how I have lamented over a missing key which, when pressed, would automatically insert the words “worst since” after almost every budget outcome announced by the Chancellor.
Now I lament the absence of another button. When pressed, it automatically “fast forwards” through pre-selected dates such as this coming Wednesday. The missives from the Treasury will simply not appear, nor any of the ensuing hand-wringing commentary. Wednesday 5 December? Quite the best outcome would be “Unable to detect”.
Unfortunately, technology has not advanced sufficiently to spare us the near farce of the projections to be rolled out on Wednesday. We cannot be spared the pain of another mind-numbing set of hypothetical projections of the British government’s Public Sector Net Debt and cyclically-adjusted net borrowing as a percentage of GDP.
Even were the figures benign, they would not, on any reckoning, be the talk of the steamie, or indeed comprehensible to most. And even among those who still follow this dance macabre of fiscal forecasting, the credibility of the numbers has long left much to be desired.
But supposing, instead of talking of ratios or percentages, we were told we were on course for an additional £23 billion of tax increases or spending cuts: I suspect the talk would become very steamie indeed.
This is the figure cited by the Institute of Fiscal Studies in its latest assessment of the public finances. Looking ahead, it reckons the budget deficit will be 1.6 per cent of GDP in 2016-17, against a 0.5 per cent surplus the OBR forecast in the Budget in March. Rolled forward to 2017-18 the deficit is put at 1.5 per cent of GDP. This, says the IFS, means an additional £23bn of tax hikes or spending cuts looming ahead – obviously “back-end loaded” (that is, stacked up for implementation by the next set of vainglorious fools who find they have drawn the short straw to be running the country after 2015).
The IFS does not comment on the consequences for growth. This may be considered a blessing. For while a programme of £23bn of tightening will reduce the structural budget deficit by 1.5 per cent of GDP, real GDP growth will be less, the negative output gap larger and Public Sector Net Borrowing stubbornly higher than hoped.
Indeed, warns Brian Reading of Lombard Street Research, the cyclical cost may be greater than the structural saving: Public Sector Net Borrowing would rise as a percentage of GDP.
Self-defeating? It is hard to avoid the deeply depressing sense of being condemned to live forever in that Maurits Escher drawing of the prisoner staircase that keeps spiralling ever upward.
To Mr Osborne falls the grim task of reporting a projection for public sector borrowing above that presented in the March Budget.
The message back at the time of the Budget was relatively relaxed. Mr Osborne cited independent Office for Budget Responsibility (OBR) support for the view that he would meet the “fiscal mandate” to achieve a cyclically-adjusted balance on the current account at the end of the five-year forecast-ing period.
The OBR also indicated that public sector net debt should be falling as a percentage of GDP by 2015-16. It also forecast public sector net borrowing (PSNB) would fall from an estimated £126bn (8.3 per cent of GDP) in 2011-12 to only £52bn (2.8 per cent of GDP) by 2015-16.
Since the key target is a cyclically-adjusted measure (automatically reflecting changes in economic conditions) this meant that a larger-than-expected deficit because of economic activity did not mean a slippage in the cyclically adjusted current balance. However, if our weak economic growth rate prompts the OBR to revise its view of the long-term trend rate of expansion, the implications for the cyclically-adjusted current balance to a lower “new normal” will not be benign at all. Structural changes will be needed to get us back on course.
Latest pointers on the public sector finances suggest a current budget deficit running moderately above the OBR’s March forecast – the OBR was previously braced for a small increase from £94.7bn to £95.3bn. But figures covering the April-October period this year show an increase from £58.3bn to £65.2bn – some 10 per cent wider than expected.
Even this might not be cause for concern if the economy was at last showing signs of a strong pick-up. But while there are flickers of growth, performance looks set to fall well short of the OBR’s assumptions on which the budget deficit numbers were based (a 0.8 per cent growth rate this year rising to two per cent next). GDP now looks likely to have contracted 0.2 per cent this year, and growth of 1 per cent or less a plausible goal for 2013.
It will be harder for the OBR to avoid the conclusion that productivity growth is much weaker than it assumed, and that trend growth in GDP is flatter. The implication of this, says economist Stephen Lewis at Monument Securities, is that the government would need to work harder, with tax hikes and spending cuts, to achieve cyclically-adjusted balance five years hence – assuming of course that the Chancellor wishes to retain such a target.
If it all sounds dreadful, it’s because it is. The hopes two-and-a-half years ago that we would by now be steaming towards a strong recovery, with consequent reductions in the budget deficit, have turned to ashes. The problems are by no means all of the Chancellor’s own making (though his weak programme of supply sided reform has left much to be desired). But the OBR has consistently erred on the side of optimism. The result is that, with the government now more than half way through its term of office, the public finances have barely improved at all and that most of the heavy lifting in terms of spending cut and tax increases still lie ahead.
There is much that could be done to stimulate business growth measures, such as an Employers National Insurance holiday and practical steps to remove the disincentives for small businesses taking on staff. And there is much we can learn from the 1930s and the economic lift provided by a substantial boost to housing construction. The Scottish Government could help here by urging local authorities to slash the long waiting times for planning approval for major housing developments.
However, as I detect little by way of encouraging vibes on either front, I fear we could be heading for a “Black Wednesday” this week.
Where, oh where, is that fast-forward button when you most need it?