Dose of Realism By Osborne But Risks Lie Closer To Home

This column is sometimes accused of being too downbeat about Britain’s economic prospects. I’ve just been joined in my apparent gloominess by none other than George Osborne.

The UK faces a “dangerous cocktail” of economic risks in a “very challenging world” the Chancellor declared last week. Addressing business leaders in Cardiff, far from talking up the UK’s prospects, Osborne issued a stark warning. “Anyone who thinks that it’s mission accomplished with the British economy is making a grave mistake,” he said.

While presenting his Autumn Statement in November, Osborne stressed how the UK was “growing fast” and “in robust health”. That allowed him to present a financial plan combining his deficit-reduction message with crowd-pleasing spending rises, while also junking unpopular welfare cuts.

Barely six weeks on, the Chancellor has changed his tune. “As we start 2016, I worry about a creeping complacency in the national debate about our economy,” he said. “A sense the hard work at home is complete and we’re immune from the risks abroad…a sense the good economic news will just keep rolling in”.

I’d defend this column as realistic, rather than gloomy. So I’m pleased the man in charge of running the UK economy is striking a more realistic tone. I’m under no illusions, though, as to the various reasons why Osborne has chosen now to display more candour.

The Autumn Statement, while politically shrewd, was a lesson in hope over experience. The money the Chancellor appeared to conjure out of the air, to much acclaim, at the Commons dispatch box was based almost entirely on higher growth assumptions, counterproductive rises in business and property taxation and a £27bn accounting windfall over the next three years. That windfall, in turn, was heavily dependent on “changes in modeling” – that is, technical assumptions about how much revenue can be raised at each respective tax rate.

It was a performance that marked a decisive shift in the UK’s economic management away from caution and towards risk – as I said at the time. Osborne now seems to agree, at least in rhetorical terms, and not a moment too soon. For the UK economy, despite progress made, does indeed remain very fragile.

As we emerged from the 2008/09 financial crisis, there was much talk of “rebalancing” the British economy, away from consumer spending and services and towards investment and exports. The idea was to put the economy on a more sustainable, less debt-dependent footing. While our headline growth is encouraging – the UK economy expanded 2.4pc last year – it’s quite clear such rebalancing hasn’t happened.

Manufacturing remains slack, the sector’s output still over 6pc below its pre-crisis peak. Consumer borrowing on credit cards, loans and overdrafts, meanwhile, is now growing at its fastest rate since 2006, the Bank of England said last week. The Office of National Statistics has also just confirmed the housing savings ratio plunged to a mere 4.4pc of disposable income during the third quarter of 2015, a 52-year low.

The UK’s current account deficit remains close to a record 5pc of national income, as exports have stalled amidst business investment that remains far too low. And, when it comes to our fiscal position, while the deficit has been reduced, the Chancellor is certain to miss his target this year, as he has every year since taking office in 2010.

The latest figures show that in November alone, for all the talk of “tough decisions”, the government borrowed £14.2bn, up from £12.9bn in November 2014. That was the third time in four months borrowing was higher than the same month the previous year – despite stronger economic growth.

Already, months before the fiscal year ends in April, state borrowing stands at £66.9bn for 2015/16, perilously close to the £68.9bn limit for the year as a whole. As such, our stock of national debt, that we must continuously service with interest payments, keeps spiraling. It now stands at over £1,536bn, up from £562bn before the financial crisis.

So why does Osborne now suddenly feel compelled to present a more realistic picture to the British public? One reason is that his deficit numbers are, indeed, unraveling and he needs to get his spin out there before the fiscal fine print I’ve reported above becomes the stuff of major headlines.

Last week, Robert Chote, the Chairman of the Office of Budget Responsibility, suggested the Chancellor may be forced to “think again” about the assumptions in his Autumn Statement. “Unfortunately, the £27bn we apparently found down the back of the sofa is not as much as it sounds,’ he said. “And what the sofa gives, the sofa can easily take away”. These admirable frank words, uttered as Chote appeared before the Scottish Parliament’s Finance Committee, received less attention than they should, drowned out as they were by Osborne’s ad hoc economic statement.

The Chancellor also sought party political advantage, of course. “Many in our politics encourage irresponsibility – suggesting we can just go back to the bad old ways and spend beyond our means for evermore,” said Osborne last week. This was a direct shot at Jeremy Corbyn. While the Labour leader struggles to implement a reshuffle, and party in-fighting explodes into the open, the Tories now look like grown-ups, stressing (even as the budget numbers get awkward) the need for on-going fiscal rectitude.

Osborne’s speech may also have been timed to take the focus off Tory ructions on Europe, following the Prime Minister’s announcement ministers will be free to campaign for the UK to leave the European Union. On top of that, if Tory backbenchers feel like causing trouble as their constituents endure spending cuts that are real and biting – in areas such as social care – the Chancellor is keen to remind them of the government’s priorities. “Unless we finish the job of fixing the public finances, to get Britain back into the black, all of the progress we have made together could still easily be reversed,” he told the great and the good of Welsh business.

The main point of last week’s speech, though, was to stress that if and when the UK economy does hit a really rough patch, and if (heaven forbid) we see another Lehman-style meltdown on our financial markets, it won’t be the fault of the UK, or America, or any Western policymakers. It will be the fault of “them” – the emerging markets, countries like China and Brazil, places far away that aren’t as prudent and responsible as us.

I jest, but not a lot. The Chancellor is clearly right to point out that geopolitical risks are sky-high and, as such, the UK economy is vulnerable. The Eurozone, our largest trading partner, is struggling under the shadow of terrorism, a dysfunctional currency and the prospect of new obstacles on the movement of people and goods. Plunging oil prices, while an economic boon, may be as alarming as they are helpful – resulting as they do from a deep US-Saudi rift. And tensions in the Middle East could yet see crude prices bounce back.

I just don’t accept, though, that for all the market volatility in China, and the obvious difficulties of doing business in nascent capitalist societies in Asia and elsewhere, that the emerging markets are currently the major potential source of systemic financial instability. That honour belongs, in my view, to the big Western economies, with their massive state and consumer borrowing, still bloated banks and swollen central bank balances sheets – the result of years of printing money. So, the Chancellor’s speech was honest. But only up to a point.

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