Spin-Doctored Autumn Statement Echoes Old Master

Gordon Brown is to stand down from the House of Commons. The Former Chancellor and Prime Minister won’t seek re-election as an MP in May 2015, we learnt last week. Some will remember Brown for his tub-thumping speeches, for his claim to have “saved the world” in the aftermath of the 2008 financial crisis or for selling much of the UK’s gold reserve at the bottom of the market.

Others might recall his hard-bitten fingernails or cringe-making caught-on-tape condemnation of “that bigoted women” – after a pensioner and lifelong Labour supporter quizzed him on immigration during the 2010 general election campaign.

I’ll always grudgingly admire Brown for defying Tony Blair on UK membership of the euro. Had the then Chancellor agreed with his Prime Minister, Blair might well have gone for a single currency referendum, which could have seen Britain now ensnared in the straitjacket of monetary union. One suspects, though, if Blair had opposed UK euro membership then Brown would have been for.

What I remember above all when I think of the member for Kirkcaldy and Cowdenbeath is his vast and regrettable appetite for byzantine policy complexity and obfuscation. Covering a Brown budget, or any of his numerous Commons set-pieces during a decade at the Treasury, was always about unwinding the statistical spin. Double-counted spending pledges, “continued growth of 0pc” and multiple off balance-sheet whizz-bangs were all part of trying to understand what was happening whenever Brown was at the despatch box.

While it’s fair to say New Labour reached new heights (or should that be depths?) of spin-doctoring, ushering in an era of deeply manipulative political communication during the late 1990s and early 2000s, such methods have endured and most certainly aren’t restricted to Brown and his party.

Watching George Osborne’s Autumn Statement last week, and examining the technical documents, was to endure data-spinning and fudging on a Brownite scale. While the Tories have made some efforts to restore dignity to our national accounts – returning selected private finance initiative liabilities to the state’s balance sheet, for instance – the smoke-screening and concept-bending for the most part continues, as was apparent last Wednesday.

Economic growth forecasts for 2014 and 2015 were upgraded to 3pc and 2.4pc respectively, higher than predicted at the time of the Budget back in March. Yet even though growth this year and next year is to be faster than previously expected, the UK’s budget deficit is actually significantly worse in both years – namely 5pc and then 4pc of GDP, far worse than Germany, Italy and even France. When growth is stronger, higher tax receipts and lower welfare spending should cut the deficit, but apparently not in the case.

Even more strangely, growth forecasts for the three years from 2016 inclusive were downgraded compared to March in this Autumn Statement, by 0.4, 0.2 and 0.2 percentage points respectively. Yet, miraculously, despite slower growth, which tends to lower revenues and increase government spending, the forecasted deficit actually gets narrower during these three years compared to previous estimates, before turning into a headline-grabbing £23bn surplus in 2019. Such forecasts defy economic logic. As such, it’s difficult to take them seriously.

This isn’t the only conceptual anomaly at the heart of the Autumn Statement. Another concerns the assertion of the independent Office for Budgetary Responsibility that “spare capacity” in the UK economy has reduced from 1.7pc of GDP in 2013 to 0.6pc today. That makes sense, seeing as unemployment has fallen and low investment has cut the availability of machinery and other capital goods.

At the same time, the Treasury has used the recent drop in oil prices significantly to cut its inflation forecast over the next four years – so reducing the future cost of inflation-adjusted benefits and the servicing of index-linked debt. This, despite less spare capacity usually being associated with higher inflation – and the very considerable possibility that crude prices could very easily rebound.

The reality, which Osborne didn’t mention, is that having been handed a budget deficit in excess of £100bn by Brown’s Labour government in 2010, the Tories have run further triple-digit fiscal shortfalls every year since. So far in this fiscal year, from April to October, the government has borrowed £64.1bn, an increase of £3.7bn compared with the same period in 2013/14, even though growth has been higher. And we’re on course, the Treasury admits, for a still colossal £91bn deficit in 2014/15.

Given downward revisions to expected tax revenues, the credibility of Osborne’s deficit reduction programme now planned for the next Parliament hinges on expenditure reductions that have yet to be outlined. The Institute of Fiscal Studies judges that only two-fifths of the spending cuts needed to generate a budget surplus have been implemented since 2010, so the majority of the pain is still to come. But, again, the Autumn Statement was extremely short on detail and long on procrastination.

The technical documents show that the impact of the spending decisions in last Wednesday’s announcement amounted to 0.0pc of GDP in 2016, then -0.1pc in both 2017 and 2018. So, relatively little pain there, let alone any detail on where the axe will actually fall. Then, to make the numbers add up, and generate the “big surplus by the end of the next Parliament” headline, a massive 0.7pc of GDP cut is pencilled in for 2019. Really? We’re being asked to accept that spending reductions in the year before the 2020 general election will be seven-times deeper than in the two years preceding? I don’t think so.

The UK faces some very tough fiscal decisions. The elected government of the day should be outlining its choices, leading a proper debate then doing what needs to be done. Next Spring’s Budget will be just before an election. By then, the coalition parties will be in full campaigning mode, at daggers drawn and with co-operation impossible. So we’ve just had the last major fiscal announcement before voters go to the polls. So where were the details or even ideas on what the UK might do finally to get our public finances under control?

The other deeply-suspect statistical wheeze that Osborne relied on was an almost entirely unexplained reduction in the cost of servicing the UK’s national debt – which, incidentally, has ballooned from around £800bn to almost £1,500bn since the Tories took office. According to the Autumn Statement, we’ll be spending £18bn a year less on debt service than previously forecast by 2018. Without this change, last Wednesday would have been a repeat of the same event in both 2013 and 2013, when Osborne was forced to announce that the deficit was much bigger than expected, with hard times set to continue. Now, because of much lower debt service costs, the Chancellor can claim he is roughly on course – and just in time for next May’s election.

The UK government currently spends more on debt service than it does on defence. With our creditors now including overseas governments, a chunky part of those interest payments – around 2pc of GDP, in fact – are now flowing abroad, weakening our external balance and putting additional pressure on sterling. Given that our national debt is continuing to spiral and interest rates are now at rock-bottom – the result of a gilts market rigged by virtually-printed Bank of England money – it seems preposterous to assume that future debt service costs will be lower than previously expected, and then to “bank” those savings in our national accounts.

Yet that’s what we’ve done – a piece of statistical spin-doctoring that would have made Gordon Brown proud.


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