George Osborne had an extremely difficult task last week, as he delivered his Autumn Statement. Our 41-year-old, relatively inexperienced Chancellor was batting, to say the least, on a sticky wicket.
Yet while he played a reasonably good game politically, as he delivered his Commons set-piece on Wednesday, I still believe that the economics of Osborne’s statement fell woefully short of what is needed to rescue the UK from its parlous state.
Osborne came into office in 2010, after years of Gordon Brown’s fiscal vandalism. As such, the current Chancellor faced the unenviable task of taking very tough and radical action to restore the UK as one of the world’s leading advanced economies.
Yet while his “austerity” rhetoric has been strong, Osborne’s policy implementation has been extremely patchy. In the fiscal year 2009/10, current government spending amounted to 42.9pc of GDP. In 2012/13, for all his “tough choices” bluster, spending will be 42.3pc of national income – by no means a significant reduction. The Chancellor talks a good game on mending this country’s finances but the task has barely begun. And amidst all the theatrics, and hair-shirted mood music, this Autumn Statement pointed only to lower growth, higher borrowing and crucial targets to get our deficit and debt under control being pushed ever further into the future.
To Osborne’s credit, he was at least brutally honest about the extent of the UK’s recent under-performance. At the time of the 2010 Budget, the independent Office for Budget Responsibility foresaw growth of almost 3pc in 2012/13 – which now looks positively deluded. Even as recently as the March 2012 Budget, the OBR was hoping for 1pc growth this year. Last week, that forecast was slashed to a paltry 0.1pc expansion. Growth projections for future years have also been hacked back.
Less growth, of course, means lower tax revenues. That in turn, given that spending hasn’t fallen enough, means large on-going annual deficits, plugged with yet more borrowing. Back in mid-2010, as they took office, the Tories hoped to “balance the budget” by 2014/15, perhaps even getting the deficit down to zero. Revenues in that year are in line to be around £16bn below those forecast in March 2012 and no less than £53bn less than projected in mid-2010.
As such, we’ll still have a deficit of 5.2pc of GDP in 2014/15. In fact, the Treasury fine-print shows that if we exclude the use of various budgetary wheezes – such as counting the “surplus” from gilts bought by the Bank of England under “quantitative easing”, and transferring assets from the Royal Mail pension scheme onto the state balance sheet – then our annual deficit is still almost 6pc of GDP in 2014/15. This is where it was back in 2009, and not far below the level that saw Britain go cap-in-hand to the International Monetary Fund in 1976.
While being straight about growth, Osborne also needs to level with the public about the gargantuan scale of our fiscal task. Between 2010 and 2015, even if the pace of spending cuts picks up markedly, departmental expenditure (excluding benefits and debt interest payments) is set to fall, in constant prices, to roughly where it was in 2007. Given the massive extent to which the state expanded under New Labour, that is hardly an ambitious programme to rein-in a bloated public sector.
In fact, once you include welfare spending and debt interest, the UK’s national debt is on course to balloon from £581bn in 2008 and £940bn last year, to some £1,600bn in 2015/16, even if “austerity” is fully implemented. This is what happens when you keep spending even when your tax take is falling. All this debt must be serviced, of course, year-in year-out, diverting money from vital spending on education, health and defence. And, of course, the UK’s debts are higher than this horrendous total – perhaps £2,800bn, or even more – when other off-balance sheet items such as public sector pension liabilities and the private finance initiative are included. Just the official numbers, though, show the UK government taking on an extra £10,000 in debt for every man, woman and child in Britain during Osborne’s “age of austerity”.
Amid the “cuts” and “tough choices”, very few voters realize the extent to which our fiscal position will deteriorate, even if “austerity” is fully implemented. The government has relied, instead, on statistical sleight of hand in a bid to win the “war of the headlines” with Labour, rather than arguing forcefully for what’s really needed – a fundamental scaling-back of the state.
Osborne announced £5.4bn of extra infrastructure investment from 2013-14 last Wednesday, while foregoing £4bn of tax receipts in 2014-15 by, among other things, delaying fuel duty rises and raising personal allowances. Still, the OBR says he will meet his “fiscal mandate” by reducing a heavily-massaged measure of the budget deficit to zero by 2016-17. The only way this all adds up is by relying on those hypothetical QE surpluses once again, plus receipts brought forward from the sale of the 4G mobile telephony spectrum. These statistical stunts help noone and just undermine the Chancellor’s credibility.
The nub of the issue, of course, is that getting out of our fiscal bind requires economic growth. Osborne can rightly point to the ferocious global headwinds the UK has faced in recent years – not only from the still-fragile Eurozone, but also the erstwhile failure of the US economy to stage a convincing recovery.
The Chancellor can also claim that he couldn’t have predicted the on-going strength of energy prices – although some of us did – that have kept UK inflation relatively high, so depressing investment and eating into real wages, so weighing down consumer sentiment and prolonging our economic gloom.
Yet Osborne has allowed a view to take hold that we’re not growing because government spending is being cut – even when the cuts are relatively small. This is absurd. A slight reduction in overall state spending has done nothing to slow the economy, whatever the Keynesian dinosaurs say, and as confirmed by the OBR.
Osborne needs to out-flank Labour by taking the argument to the broader public that we’re not growing because debt levels are so high, because our marginal tax rates are high (and generally rising) and because the “bonfire on red tape” has barely flickered. Above all, we’re not growing because our banking system remains dysfunctional, and the credit channel blocked, as our financial institutions continue to sit on billions and billions of pounds of undeclared losses.
I don’t have any ill will towards the Chancellor. In my view, he is an intelligent man, who had the opportunity to do pretty much anything in life he wanted, but chose to serve his country and pursue high office. He came into politics for the right reasons, it seems to me, and was bequeathed an absolutely ghastly fiscal inheritance.
Having gained the keys to power, though, the Cameroons – and Osborne in particular – need very rapidly to decide what they are going to use high office for. Are they in it to triangulate and spin, to out-play Labour in the parlour game of Westminster politics? Or do they want to make the really radical changes needed to save their country from the ignominy of sovereign default, a currency collapse and economic oblivion. The choice really is that stark.