Alan Massie: Europe is the key to UK’s recovery

For all the measures the Chancellor introduces, the eurozone is critical to Britain’s fortunes

“THERE are bad times just around the corner, we can all look forward to despair,” sang Noel Coward, quite cheerfully. Well, the bad times arrived, of course, some time ago, and there are still more to come. This wasn’t exactly the message that the Chancellor hoped to convey in his autumn statement, but it’s the message most of us will take from it. Hopes of robust recovery from the disasters of 2008 have regularly proved premature, and may as well be put on hold for a few years yet.

Despite the programme of deficit reduction and despite public sector pay freezes and cuts in public spending, government borrowing is continuing to rise, if only just a wee bit more slowly than before. In happier days Gordon Brown assured us he had brought an end to the cycle of boom and bust. As of now there’s no sign of an end to bust and gloom. George Osborne’s manner yesterday didn’t make his message more palatable. He kept his nose in his papers and muttered. He is not the man to lift our eyes to the bright shining uplands, and probably an attempt to do so would have been vain, the said uplands being hidden by mist and rain. We had lots of jam yesterday, but no jam today and there is little prospect of much jam tomorrow.

Nevertheless Plan A – reduction, leading to removal, of the structural deficit – has not been abandoned. Its completion has only been postponed. This isn’t, in the gospel according to George, his fault, or indeed ours. Much of Europe, he said early on, is heading for a recession caused by the failure of countries to deal with their sovereign debt. The austerity programmes they are having to adopt make it inevitable that austerity is prolonged here too. At least I think this was his message.We are suffering because they are out of step.

Nevertheless he insists that our position is less parlous than that of the eurozone countries because the markets still trust us, interest rates remain low here, and we have recently been able to borrow more cheaply even than Germany. If interest rates on the new debt we incur were to rise to Italian levels, we would really be in the soup, and deficit reduction would become even more difficult than it is proving to be. Moreover the independent Office for Budget Responsibility (which he created) does not predict a recession here. Growth won’t quite disappear over the next couple of years and will rise to more than 2 per cent in 2013. Perhaps. The Office for Budget Responsibility’s forecasts may prove more reliable than the Treasury’s have usually been, but it would be a rash man who bet heavily on this.

The trouble everywhere – in the eurozone, in the US and in the UK – is the weakness of demand in the economy. He didn’t quite say this; perhaps he thought it unnecessary to state the obvious. He did speak of the need to stimulate the supply of money and credit, and the Bank of England has embarked on another round of quantitative easing, otherwise known as printing more money. Measures announced to encourage more bank lending and to get pension funds to invest with the support of government backing directly in businesses – “British savings for British jobs” was George’s slogan – may help get credit flowing, but where is the demand when household incomes are coming under strain? Nobody who is unemployed, and nobody employed in the public sector, where the pay freeze will be followed by a lower-than-inflation pay rise restricted to 1 per cent, is going to be spending more. Nor will anyone who thinks their job insecure; nor will many of the self-employed who are doubtful about the level of demand for their services. Still, the Chancellor promised – or I think he promised – to raise the income tax threshold in the next Budget and he postponed the planned increase in fuel duty. For this relief much thanks.

There were also lots of Gordon Brown-style micro-management measures intended to stimulate growth. Fair enough, but very few will have an immediate effect. There’s no point going over them in detail because almost all the particular infrastructure projects and other schemes which he announced apply only to England. This is the price, or reward, of devolution. As far as we in Scotland are concerned, all he could say was that proportionate sums for stimulus would be available to the devolved administrations – presumably by means of the Barnett Formula. It would then be up to the Scottish Government to spend this additional money as it thinks fit. Over to Mr Swinney to use the money wisely.

The Chancellor is walking a tightrope, a bit unsteadily. So is the British economy. The OBR’s forecasts may well be over-optimistic. Much will depend on whether the global economy grinds to a halt or where growth takes place if it does. A lot of faith seems to have been placed on our ability to take advantage of the devalued pound to export our way to growth. If this doesn’t happen will there be further devaluation and consequently higher inflation? Who knows? Not I, not you, not the Treasury, nor the serried ranks of expert economists from whom you can buy as many opinions as there are days in the month.

In the immediate term we can only trust that the money markets retain enough faith in the United Kingdom to keep lending us money at lower rates than they are demanding from other countries. The Chancellor is right to insist on this. Yet his very insistence demonstrates how little scope for action he has, how greatly he is dependent on retaining the confidence of the markets. If he loses that, we are swimming in deep and turbulent water without a lifebelt. Few of us understand how these markets work and most of us are deeply suspicious and resentful of them, but one thing has been made abundantly clear since the financial crisis broke. Politicians may still claim to be able to guide the economy, even if sensible ones have abandoned the idea that they can control it, but their powers are very limited. They are at the mercy of the anonymous men and women who sit before computer screens moving money about.

What the politicians can certainly do is make bad decisions which alarm the markets and so make bad times worse. It is very much more difficult for them to make good decisions. They can only tinker a bit here and there, and hope that some of the tinkering will be beneficial. Mr Osborne’s autumn statement is, at best, a holding action. Let us hope the eurozone countries achieve some resolution of their problems. The Chancellor should keep his fingers tightly crossed at this week’s meeting of European finance ministers.