The Chancellor’s Autumn Statement: one step forward
Glen O'Hara |
Tuesday's Autumn Statement by the Chancellor contained many welcome measures, and shows he is tiptoeing away from some of his previous mistakes. There is to be more spending on Britain's ageing rail lines, roads and urban infrastructure. There is to be more help for family budgets, though the freezing of many tax credits will more than counterbalance this for those on low or middling incomes. Business borrowing is to be assisted through some skilful and imaginative financial engineering.
Above all, the rhetoric has shifted. Mindful of his earlier errors in talking up the dangers facing us and talking down the previous administration, growth measure after growth measure was trailed in the days leading up to the Autumn Statement. Some of these were exaggerated or over-spun, but they are all steps forward from the previous emphasis only on the deficit, and only on the Government's 'cuts' programme. Many past governments have made this mistake, notably the incoming Labour governments in October 1964 and May 1997, both of which condemned their predecessors before later adopting more pro-growth rhetoric. Harold Wilson's administration talked up a grim 'Dunkirk' of more and more economic pain caused by an inherited balance of payments deficit. Only once his government had been forced off the pound's dollar parity in November 1967 did it start to talk urgently about 'technology', 'efficiency' and labour market reform - all elements of a truly effective economic policy that the struggle for sterling had obscured.
Sadly, neither Ministers nor the civil service are able to build up long personal or institutional memories, and we have had to slog through that process yet again. Only now has the Chancellor loosened the purse strings, and only a little.
Still, leveraging British pension funds and international sovereign wealth funds by bringing forward infrastructure spending - for instance on motorways - might help to dig us out of our present hole. Cancelling the fuel duty levy increase, subsidising rail fares and continuing to pay for a council tax freeze will also help labour mobility - as will more help with child care costs, helping more parents combine work with childrearing.
Yet the immediate problems facing our economy are not caused by a lack of infrastructure, low labour mobility or lagging labour productivity. Those are all important issues, but tackling them now will only reap rewards in the long term future. What we face right now is an enormous crisis of confidence among consumers, within the banking system, and on the bond markets: a vast hole of present and potential demand that the Autumn Statement does not do nearly enough to fill. A direct government spending increase on building physical capacity of perhaps £5 billion over the next three years amounts to very little when the British government spends more than £700 billion a year. It certainly does nothing to replace the £50 billion or more of infrastructure cuts that the Government announced only last year. Some of this new spending seems to have been poached from tax credits, which may further reduce consumer demand over the next year.
The Office for Budget Responsibility (OBR), set up by the Chancellor, has come up with some truly shocking numbers that show just how steep our climb back to prosperity will be. Growth this year and next will be much lower, under one per cent. Unemployment will be higher, and is unlikely to fall in the near future. That means that government costs are mounting. Borrowing will be even higher than projected under the previous government, and much higher than the Government planned even a few months ago. There is now absolutely no chance that the Government can reduce the structural and non-cyclical deficit to zero in this Parliament, as confidently predicted by the Chancellor in the Budget.
Mr Osborne, of course, can take advantage of the small print in his Fiscal Mandate, pointing out that that aim is only to reach balance over a rolling five-year time horizon. His other objective, to see the UK's debt stock falling by the end of this Parliament, apparently does not preclude it then rising in the first year or two of the next. The Chancellor might just squeeze through the eye of the needle, even if things go as badly as the OBR forecast. But the Organisation for Economic Co-Operation and Development now believes we may be in for a second recession, and many other independent forecasts are similarly gloomy. If that turns out to be the case, then the Chancellor will have to come back for further bites at public spending both before and after the 2015 General Election. Whatever the international situation by then, there is no guarantee that voters - by then feeling the full force of the current cuts - will be prepared to ratify a fresh round of government retrenchment. Even when the economy started to look rosier under Labour in 1950-51 and 1969-70, or under the Conservatives between 1995 and 1997, voters still threw out those they held responsible for the pain of long periods of austerity.
The present Conservative-led administration makes much of its centrist, One Nation credentials. But, historically, most Conservative heroes identified with the One Nation ideology - especially Benjamin Disraeli and Harold Macmillan - would have been appalled. As the world economic storm becomes more menacing, the Chancellor is going to gamble all on a fresh round of cuts and restraint without knowing where the growth he really needs to pay off our debts is going to come from. His Autumn Statement measures will increase child poverty and sharpen regional divisions with the possible abolition of national pay rates in the public sector. This is unlikely to make anyone feel like they belong to 'One Nation'. Some of Britain's poorest areas had only just begun to recover from the economic catastrophe unleashed by the deep manufacturing depression of the early 1980s. Now they might be cast adrift once more.Please note: Views expressed are those of the author.