PREVIEWING THE AUTUMN STATEMENT
This week’s Autumn Statement represents the government’s last real chance to put down some economic and fiscal markers ahead of the election, and what I’m going to do here is to set out a context. The Prime Minister has already paved the way, “getting his excuses in first” (as some commentators have put it, rather unkindly) by highlighting the “red lights” blinking on the global economic dashboard.
My conclusions are that the recovery in the economy is misleading, in two respects. First, we are continuing to borrow a lot more than £1 for each £1 of growth. Second, growth is based on an expansion in jobs, but these jobs are so poorly paid that no net contribution is being made to the Treasury. Reflecting weak revenues, the deficit is likely to rise from £96bn last year to around £100bn, instead of falling to the £84bn projected officially at the time of the budget.
Frankly, it is a relief to get back to economics after recent political events. The Rochester by-election was encouraging, at least in the sense that it gave each of the established, corporatist parties a poke in the eye, but it was overshadowed by the resignation of a Labour shadow minister over “white van” images.
This incident spelled out the absurd contradictions at the heart of British politics. “Ordinary” people must not be patronised. You must not call them “pleb” or “white van man”. Feel free to load them to the gunwales with debt, to allow employers to pay them less than the bare minimum for survival, to permit “zero hours” contracts, to allow them to die unnecessarily in Stafford, or be abused on an industrial scale in Rotherham, yes.
But please be polite about it.
Even in an age of spin over substance, could anything be more cynically hypocritical?
At least the economic and fiscal situation has some cleanliness about it, even if it is hedged with “buts”. Here are some of them:
– The economy is growing, but growth is exceeded by incremental borrowing.
– Job creation has been strong, but wages are far too low.
– Public spending has been cut, but not by very much, the deficit remains far ahead of targets that have already been revised year after year, and debt is a lot higher than expected.
– The government’s record has been mixed, but things would have been very much worse under Labour.
And so on.
Starting with the economy, growth is likely to be around 3% in the current (2014-15) fiscal year. Add back the GDP deflator and purely nominal economic output, not adjusted for inflation, is likely to have risen by around £80bn. That seems pretty good, until you realise that the government alone is likely to have borrowed about £100bn. Add in borrowings by households and we are still playing the same dangerous shell-game of achieving “growth” by channelling borrowing into consumption.
According to official plans, public spending is supposed to come in at around £732bn this year, up £16bn from 2013-14. If this were achieved, total spending (at constant 2013-14 values) would be £718bn, modestly (£11bn, or 2%) lower than the £729bn spent in Labour’s last year (2009-10).
Though this overall cut seems small, we need to recognise that the cost of servicing the government’s soaring debt pile has risen by £19bn over the same period, so primary (pre-interest) spending has declined by £29bn (4%) under this government. Within this pre-interest total, and despite stalwart efforts by the Treasury, welfare costs have continued to rise, so departmental expenditures at constant values declined by 8%, to £473bn in 2013-14 from £515bn in 2009-10. Since both health and overseas development have been ring-fenced, other departments have experienced double-digit cuts, yet overall spending reductions have been pretty modest.
Revenue, meanwhile, was projected to rise to a nominal £648bn this year (including APF gains of £12bn), a real-terms increase of 2.7% over 2013-14 (though up 5% in nominal terms), and up 13.9% if compared with 2009-10. Expressed at constant 2013-14 values, then, official targets show revenue 14% higher, and spending only 2% lower, than in the last year of the previous government. This in turn means that critics’ accusations (that spending cuts have borne the brunt of fiscal rebalancing) are simply nonsense – this government has raised far more in taxes (£78bn) than it has cut from overall spending (£11bn).
Had everything gone according to plan, the chancellor would have been able to project an underlying current-year deficit of about £84bn, lower than last year (£96bn) and, in real terms, barely half of the shortfall inherited from Labour. On a primary (ex-interest) basis, the coalition would have eliminated almost 80% of the inherited deficit.
As recent figures have revealed, however, things have not been going according to plan in the first seven months of this fiscal year. Revenues, projected to grow by 5%, are only 1% higher, which means that income has actually shrunk in inflation-adjusted terms. Total spending, which has increased by 2%, is in line with forecasts, and essentially static in real terms. Even so, the deficit in the first seven months was £6bn higher (rather than, as expected, about £6bn lower) than in the year-earlier period. On this basis, government could be stuck with a significant overshoot, with the full-year deficit climbing to perhaps £100bn.
More worryingly, public debt has already risen by close to £110bn thus far in 2014-15, and may stand at £1.48 trillion (86% of GDP) by the end of March, a lot higher than the official projection of £1.35 trillion (77%).
What, then, can we conclude ahead of the Autumn Statement? First, the deficit has fallen very materially, in real terms, under this government, though it has not declined by anything like the amount projected back in 2010.
Second, the brunt of this deficit reduction has been borne by tax increases, not overall spending cuts, over the lifetime of this Parliament.
Third, however, revenue growth has ceased, despite the upturn in GDP, mainly because the reduction in unemployment has been accomplished through the acceptance of poorly-paid jobs. At the same time, the cost of in-work benefits has risen, again because of the low-wage nature of the recovery.
So what we are left with is a workforce which, whilst it has expanded, still needs government subsidies, and earns too little to increase its contribution to the government’s coffers.
It’s a recovery, of a sort, but it is debt-based, and remains incapable of funding the amounts spent by the state.
Under Labour, we learned that government spending could not be afforded in bad times. Now, we are learning that it cannot be afforded in better times either.
The “austerity” that we’ve experienced so far may be dwarfed by the austerity still to come.