Comment: George Osborne’s austerity ever–more unsustainable

By GEORGE KEREVAN
Published on 21/07/2012 00:00

WHEN an economy falls into recession, the first thing out of the window is the government’s budget projection.

WHEN an economy falls into recession, the first thing out of the window is the government’s budget projection. So it comes as no surprise, with the UK headed for a third successive quarter of “negative growth”, that public borrowing is off target – up by half a billion pounds in June, compared with a year earlier.

Chancellor George Osborne will argue that total borrowing for the start of the fiscal year (April through June) is half of what it was in 2011. But this is a statistical fiddle. Last year’s numbers were artificially depressed by transferring the Royal Mail’s £28 billion pension assets to the Treasury, which promptly used them to pay off debt. If you ignore that sleight of hand, borrowing to date is up nearly 12 per cent, instead of a planned reduction of 4.6 per cent.

Of course, UK total debt is still only 66 per cent of GDP (though rising) while the cost of Treasury borrowing is rock bottom and likely to stay there. The problem for the British economy is not more borrowing – even the International Monetary Fund (IMF) would like some fiscal easing. Rather, we have a Chancellor who is wedded to the idea that his and the coalition’s credibility depends on austerity and lots of it.

Originally the coalition was planning on clearing the structural deficit by 2015. Last year, having taken the equivalent of 2.5 per cent of GDP out of the economy thereby precipitating a double-digit recession, the date for balancing the books was put back to 2017. This week David Cameron suggested austerity would have to continue till 2020 – a risky admission given Labour has an eight-point lead in the polls.

But the coalition is rapidly running out of allies. On Thursday the IMF slashed its forecast for UK growth to a tepid 0.2 per cent. It warned that “fiscal adjustment for 2013-14” – IMF code for austerity – would need to be scaled back “if growth does not build momentum by early 2013”.

In plain words, the IMF is inviting Osborne to produce an expansionary Budget next March. The IMF has been hinting at how this could be done without a full-scale retreat from getting the structural deficit under control. It involves what economics students in my day knew as the “balanced-budget multiplier”.

It works like this: if the government raises taxes by £100 then spends this extra £100, the impact on borrowing is neutral, i.e. the budget is balanced. But provided the new spending is focused on growth areas, the economy expands, tax revenues go up, and the deficit eventually falls. Prior to this year’s Budget, the Social Market Foundation (SMF) think-tank published a detailed paper outlining how this might work in the UK. It suggested raising an extra £15 billion per annum by cutting higher rate relief on pension contributions, capping Isa holdings, eliminating winter fuel payments for better off pensioners, and scrapping free bus travel. This cash would be spent immediately on new building projects.

Some of the SMF’s tax-raising ideas are open to debate – what politician would cut free bus travel? But since half of UK GDP passes through government hands, surely there is scope for Osborne to reshuffle tax and spending to boost growth, without increasing borrowing.

Soft landing for ‘loss making’ Microsoft

ACROSS the pond, the economic debate is beginning to look like the UK’s: how to boost growth? This week’s US economic data was dire, with regional manufacturing output in a worse state than anticipated.

The head of the Federal Reserve, Ben Bernanke, did not help matters by failing to announce a much anticipated monetary boost.

Curiously, the US stock market remained buoyant, probably the result of a raft of good industrial earnings reports. The odd man out was Microsoft, the veteran software giant. Despite record sales, Microsoft announced its first (technical) loss in 26 years, writing off its disastrous £4bn purchase of aQuantive, an online advertising company.

But don’t worry: £4bn represents barely one month’s earnings at Microsoft. Fortunately, the company’s latest purchase – a cool £5.5bn for Skype, the internet telephone service – has boosted earnings in Microsoft’s entertainment division by 20 per cent. Who says computers have killed the art of conversation?