MARTIN WOLFE FT SHOULD BE READ Autumn Statement: A political chancellor’s delusional plan Economic priority was never fiscal austerity; it was growth CUTS IN GOVERNMENT SPENDING WILL TAKE US BACK TO THE 1930S from £5,650 to £3,880 per head Has George Osborne, and the coalition government whose economic policies the chancellor has overseen, managed the public finances and economy since 2010? How reasonable are his plans for the next term? The last Autumn Statement before the general election raises these big questions. Crucially, Mr Osborne plans to deliver the needed fiscal adjustment via further cuts in spending. It is vital to understand the implications of such plans. They do far more than aim for an overall fiscal surplus. They also propose extraordinary cuts in spending. As the OBR notes, “Between 2009-10 and 2019-20, spending on public services, administration and grants by central government is projected to fall from 21.2 per cent to 12.6 per cent of GDP and from £5,650 to £3,880 per head in 2014-15 prices”. About 40 per cent of these cuts are planned for this parliament; another 60 per cent comes during the next. Spending is projected to fall to 35.2 per cent of GDP by 2019-20 – taking it, quite possibly, to its lowest share in 80 years. Start with the past. The chancellor keeps repeating that the crisis he inherited was mainly fiscal. Since public sector net borrowing was 11.1 per cent of gross domestic product in 2009-10, this seemed plausible. In delivering the Autumn Statement, the chancellor duly asked whether “we squander the economic security we have gained, go back to the disastrous decisions on spending and borrowing and welfare that got us into this mess”. The proposition that the crisis was fiscal has allowed the chancellor to blame Labour profligacy, rather than a widely shared failure to appreciate the fragility of an economy based on financial services and soaring private debt. The implication was also that fiscal austerity was essential. In his first Budget in June 2010, Mr Osborne duly promised to reduce public sector net borrowing to just 1.1 per cent of GDP by 2015-16. In the event, net borrowing will still be 4 per cent of GDP next year on the latest forecasts from the Office for Budgetary Responsibility. As a result, public sector net debt, which according to forecasts in 2010 was supposed to peak at 70.3 per cent of GDP in 2013-14, will instead peak at 81.1 per cent in 2015-16. The fact that the government has failed to meet its initial fiscal objectives while still being able to borrow very cheaply proves that the fiscal hysteria was exaggerated. The economic priority for the UK was never fiscal austerity; it was securing growth. Given this, actual economic performance has been both welcome and disturbing: welcome for the remarkable growth of employment; but disturbing, in the OBR’s own words, for the fact that “wage and productivity growth have once again disappointed”. Moreover, the growth is not filtering through to big increases in government revenue. This is part of the reason why deficits have remained so large in spite of the discipline over spending. Thus, from the point of view of both fiscal revenues and the generation of sustained rises in standards of living, the “long-term economic plan” has not been working. To illustrate: by 2020, on the OBR’s forecasts, gross domestic product will be 17 per cent smaller than it would have been if the 1990-2007 trend had continued. Now turn to the future. In keeping with the view that the UK challenge remains essentially fiscal, the chancellor promises to deliver an overall fiscal surplus by 2018-19. Indeed, he plans to introduce a Charter for Budget Responsibility to reinforce the commitment. The purpose of such hortatory legislation is, however, purely political. Crucially, Mr Osborne plans to deliver the needed fiscal adjustment via further cuts in spending. It is vital to understand the implications of such plans. They do far more than aim for an overall fiscal surplus. They also propose extraordinary cuts in spending. As the OBR notes, “Between 2009-10 and 2019-20, spending on public services, administration and grants by central government is projected to fall from 21.2 per cent to 12.6 per cent of GDP and from £5,650 to £3,880 per head in 2014-15 prices”. About 40 per cent of these cuts are planned for this parliament; another 60 per cent comes during the next. Spending is projected to fall to 35.2 per cent of GDP by 2019-20 – taking it, quite possibly, to its lowest share in 80 years. If achieved, that level will prove unsustainable. Taxes will have to rise if the target of an overall fiscal surplus is to be sustained. Alternatively, as the Labour party argues, the goal needs to shift to a surplus on the current budget, which excludes public investment. The justification for a fiscal surplus is that public debt needs to be lowered to cope with future shocks. But that is far from the only risk to economic stability. The mistake, yet again, is to treat the UK economy’s past and prospective risks as fiscal. They are also financial The UK ran a current account deficit of close to 5 per cent of GDP in the third quarter. The OBR believes, optimistically, that this will fall below 2 per cent of GDP by 2020, when the government’s financial surplus will be 1.5 per cent of GDP. According to the OBR, by then the household sector will be running a financial deficit of more than 3 per cent of GDP, a swing of 4.6 per cent of GDP from its surplus in the third quarter of 2014. If, as seems more likely, the current account deficit will remain far higher, the household’s financial deficit will need to be much bigger still. This is unlikely to occur without another housing-linked credit boom. Yet this obvious risk with the planned move into overall fiscal surplus is being ignored. This is not to deny that the fiscal position matters. But the overwhelming priority it has been given by this chancellor in explaining the crisis is a mistake driven by politics. What matters still more is the inability of the economy to generate rapid productivity growth and avoid a return to the debt-driven demand of pre-crisis years. On this, the “economic plan” has little to say. The chancellor can respond that the opposition also has next to nothing to say on these risks. That is true. The debate on policy in the run-up to the general election is utterly dispiriting. martin.wolf@ft
Posted on: Thu, 04 Dec 2014 06:54:01 +0000
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