RESPONDING TO THE AUTUMN STATEMENT
For good or ill, today marked the chancellor’s last chance to set out the economic and fiscal outlook, as it sees it, before everyone gets mired in the pre-election scrum.
Essentially, and from a political perspective, Mr Osborne wanted to leave voters with two main messages.
The first of these was that both the economy and the public finances are improving.
The second is that things would have been much worse under Labour and, by more than simply implication, would deteriorate were Labour returned to office.
Let’s deal with the latter point first, on which the chancellor is surely right. In a recent speech, opposition leader Ed Milliband completely forgot to mention the deficit, but I did not feel deprived of information as a result, since I have no idea what, if anything, Labour’s economic position amounts to.
In the early days of this administration, Ed Balls accused the coalition of cutting too far and too fast. The obvious inference was that he would have cut less deeply, and more slowly. Fair enough, and he is (or perhaps I should say ‘was’) by no means alone in his mistaken belief that Keynesianism could resolve our current predicament. Now, though, he castigates the government for failing to hit its deficit targets, which surely means that he would have cut deeper, or would have increased taxes by even more.
For the record, and at constant 2013-14 values, Mr Osborne has increased taxes by £78bn and cut overall expenditure by just £11bn (though the latter includes departmental cuts of £42bn, offset by increases in debt interest and welfare costs).
Would Labour, to some extent a hostage to public sector unions, really have cut spending by more than Mr Osborne? Would they even have implemented the same freeze on public sector pay? I’m sorry, Ed and Ed, but I’m simply not convinced. It’s a fair bet that debt would have been even higher than it is now, had the heirs to Gordon still been steering the ship.
As an aside, let me explain why a Keynesian solution wouldn’t work. If demand is weak (in what is known as a “de-stocking recession”), government can indeed stimulate the economy by injecting borrowed money.
But this was (and is) a totally different kind of slump, technically a “de-leveraging recession”. It was caused by excessive debt. So, if the government were to put money into the economy, the private sector would have used it simply to pay down its own debt – private debt would have been transferred to the state, then, but demand would not have been stimulated.
In any case, this government hasn’t exactly been un-Keynesian. Far from reducing debt, it has increased it enormously, since public debt is expected to have risen to £1,489bn by next April, in nominal terms a near-doubling from £760bn in April 2010. Rather, this administration has simply slowed the rate at which we add to the debt pile each year. Adjusted to current values, Mr Osborne will have added £670bn to national debt over five years. That’s equivalent to an annual average stimulus of just over 8% of GDP.
This, of course, is where the first of Mr Osborne’s two claims breaks down. It is simply not true that either the economy or the fiscal situation is positive. This year, for instance, the economy is likely to grow by £80bn, but government alone will borrow more than that, to which should be added the big sums borrowed by households, most of it channelled through mortgage debt as our over-valued housing market continues to defy gravity.
And this, I’m afraid, is “same old, same old” – borrow money, spend it, and claim that your income (the economy) has risen.
Now, given that debt (both state and household) has soared, you might wonder why the bond markets haven’t punished us with higher rates (yet, anyway). There are two reasons for this. Firstly, there has been a global inflation of asset markets through QE, which has depressed interest rates world-wide.
Second, Britain looks like “the prettiest horse in the knacker’s yard” – “our economy may look tatty, but just look at some of the others!” If you wanted to move money out of Britain, where would you put it? China, where the debt mountain is very probably even bigger? A Europe forced into brutal internal devaluation through the idiocy of the one-currency, multiple-budgets system? Japan, which has adopted a policy of economic suicide? Russia, which the forex markets tell us is back in the disaster territory of 1998? Or even America, where bond markets remain in vertigo-land thanks to huge QE?
The real measure of our economic position is how much debt we have accumulated, relative to how much growth we have enjoyed. Do this sum, add in our huge current account deficit as well, and you’ll soon see that we are continuing to live on tick.
That most other countries are doing the same, or worse, is a comfort, but only a relative one.
As Mr Cameron has so rightly said, there are “red lights” flashing on the global economic dashboard. At home, the housing market could crunch if the Emperor’s new clothes (the ratio of house prices to disposable incomes) were ever to be noticed, or if interest rates were forced up by a global recognition that asset markets have been inflated artificially.
Britain is not, then, in a good place economically (and I’ve made no secret of my view about some of the things that ought to be done). Fiscally, our spending remains far too high, though let’s give credit to Mr Osborne for the first real cuts in spending since the IMF held Jim Callaghan’s feet to the fire in the 1970s.
This said, the only point that the chancellor really wants voters to take away from his statement is that things would have been worse under Labour.
And he’s certainly right about that.