George Osborne must do more than talk tough on debt
George Osborne faces a bleak set of circumstances ahead of this Wednesday’s budget. The UK economy is extremely fragile and we’ve just endured the ignominy of a sovereign downgrade.
The Conservatives, on top of that, are trailing in the opinion polls, with the Chancellor himself now a “net vote loser”. Oh – and having seen their party come third behind UKIP in the Eastleigh by-election, the Tory not-so-faithful are becoming ever more restive.
If the “big picture” budget backdrop looks tricky, though, the underlying fiscal situation is, if anything, even worse. Between April 2012 and January 2013, the first ten months of the current fiscal year, public sector net borrowing was £65.8bn, according to the latest official data. While that’s a massive total, ministers have stressed, with some satisfaction, that it’s £26.5bn less than during the equivalent period in 2011/12.
Although that’s true in a narrow accounting sense, the headline fiscal numbers have been flattered by “one-off” factors. These include the shifting of assets from the Royal Mail pension scheme onto the government’s books, an equivalent transfer of “surpluses” from the Bank of England’s Special Liquidity Scheme and the shunting of cash balances generated by “quantitative easing”, again from the Bank to the Treasury. Once such book-keeping tricks are excluded, the government actually borrowed £99.9bn during the current fiscal year to the end of January, with “underlying” public sector net borrowing £7.6bn higher than the same period in 2011/12. That’s the harsh reality.
Around the time of last December’s Autumn Statement, mainstream economic forecasters pointed to a current year fiscal deficit of around 6pc of national income, a marked improvement on the previous year’s 7.9pc of GDP. Again, though, all is not as it seems. Strip out the fiscal whizz-bangs referred to above and the consensus deficit forecasts were actually closer to 8.0pc of GDP, worse than the 2011/12 outcome.
It’s also worth noting that the numbers I’ve cited above relate to a recently-invented public sector net borrowing measure called PSNBX – which excludes “financial interventions”, that is bank bail-outs and other support for the fiscal ruinous parts of our financial services industry.
While we don’t know what prices we’ll get once government-owned chunks of our big clearing banks are eventually offloaded, these sales won’t make much and look far more likely, in fact, to crystalize a hefty loss. So, once again, the fiscal numbers used in our national debate – to the extent that debate ever gets beyond finger-pointing and mindless sloganeering – paint an overly rosy picture.
How can this be? After all these years of “austerity”, why are the UK’s annual deficit numbers still so large, and getting larger? Why is our national debt stock that we spend taxpayers’ money servicing each year not only getting bigger, but increasing at an increasing rate?
Well, while the coalition has talked tough on fiscal consolidation, its actions have been markedly less so. Some of us have been citing this uncomfortable truth for a long time, so it’s good to see some leading Conservative politicians now doing the same.
Such fiscal consolidation as we have had means significant numbers of public sector workers have indeed lost their jobs. Defence cuts have caused some service personnel and their families, having served with distinction, unduly to suffer. No one is saying there have been no cuts, and that no human suffering has resulted from the government’s austerity measures. That would be callous and absurd.
Someone still has to point out, though, before the budgetary bun-fight that will follow Wednesday’s statement, that taken in the aggregate, the UK’s fiscal stance has been very, very different indeed from the austerity measures that Osborne, having just taken office, laid out in his “emergency” budget of June 2010.
Back then, the Chancellor iksaid the primary budget balance would tighten by 4.3pc of GDP in the fiscal years 2011/12 and 2012/13 combined, a sizeable adjustment of more than 2pc of GDP per annum. Last December’s Autumn Statement disclosed, though, that the actual adjustment across that two year period, which ends next month, will be just 1pc of GDP – so around 0.5pc of GDP per year. That’s a fiscal consolidation less than one quarter as ambitious as that announced by Osborne in his first fiscal set-piece.
The 2010 budget projected the UK would achieve a current budget surplus (excluding interest payments) by 2014/15. The Treasury has since said that won’t happen until 2017/18. Meanwhile, as the deficits continue, the national debt, by definition, continues to mount. Osborne’s 2010 budget forecasted government debt would peak at 85.5pc of GDP in 2012, before falling to 80.4pc in 2015. The latest Autumn Statement instead predicted a debt-peak of 97.4pc of national income in 2015, a level akin to the “Club Med” countries on the Eurozone periphery, before falling to 94.4pc in 2017.
Since Osborne last presented the national accounts to the Commons in December 2012, our fiscal situation has worsened, not least as we now know that the UK economy contracted 0.3pc during the fourth quarter of 2012. Talk of a “triple-dip” has since been fuelled further by some pretty horrendous production figures, not least in manufacturing.
Even back in December, though, the lack of fiscal consolidation so far meant Osborne was predicting the pace of his “austerity” programme would crank up. The UK’s fiscal stance was to tighten by 1pc of GDP in both 2013/14 and 2014/15, twice as fast as we’ve seen since 2010. What’s almost certain to happen on Wednesday is that this tightening will be partially offset, again, by some kind of high-profile spending boost – amounting to, perhaps, £10bn, or around 0.5pc of GDP. In general, I have no quibble with that – as long as the spending doesn’t offset the broader, ultimately unavoidable contraction, and is spent on infrastructure, so helping to generate future growth, rather than being frittered away in transfer payments.
With so little room for fiscal manoeuvre, the real action in this upcoming budget is likely to be on the monetary side – and here, as regular readers won’t be surprised to read, I really do have a problem. The government is desperate for growth, of course, not least because when the economy is sluggish, or even contracting, the fiscal balances get even worse.
That’s no justification, though, for “pump-priming” the economy in a crude Keynesian fashion. While there are no sure-fire ways to secure growth, there most certainly are policies that we bring about economic freefall. One of the most guaranteed routes to disaster would be the creditors’ strike, soaring inflation and plunging currency that could so easily be sparked were we to throw fiscal caution entirely to the wind and ramp up government spending.
Neither will we secure growth, though, by printing more money or, as the Chancellor is likely to do, by explicitly “easing” the Bank of England’s remit to “allow” higher inflation. Since the credit crunch began, those of us who’ve warned about high inflation have been ridiculed for our trouble. Yet the cost of living, as this newspaper has often pointed out, has already risen four times faster than earnings over the past five years. That’s caused the real wage squeeze that’s sapped demand and confidence to a far, far greater extent than any “lack” of public spending.
Excessive monetary expansion, you see, is just muddled Keynesian thinking, but in a different wrapper. It’s a lesson I hope the Chancellor will show us he’s learnt this coming Wednesday. But I suspect he won’t.