My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
Set pieces like budgets and autumn statements are like selection boxes. There is a lot to choose from so you are tempted to try everything.
For George Osborne's fourth autumn statement, delivered on Thursday, there are many things I could dwell on, from measures to ease the burden on business - including rates - to action to encourage firms to take on young workers by abolishing employers’ National Insurance contributions for under-21s.
I could talk about fuel duty freezes that in a couple of years will be worth an average of £11 a tankful (compared with increases under the now-abandoned escalator) or the decision to hit foreign property owners with capital gains tax.
Let me, however, concentrate on just two aspects of the statement, the most important aspects: growth and the public finances. The upward revision to the Office for Budget Responsibility’s growth forecasts, taking this year up from 0.6% to 1.4%, was inevitable given the run of the quarterly gross domestic product numbers,
By normal standards, 1.4% growth would be a disappointing year and 2.4% - the OBR’s forecast for next year - merely middling. These are not, of course, normal times. Britain’s quarterly growth of 0.8% in the third quarter was good enough for a couple of hours to take Britain to the top of the G7 league, until an upward revision of America’s GDP figures took them to 0.9%.
An initial response to the autumn statement.
George Osborne is a political chancellor and he lost no opportunity in his fourth autumn statement to achieve maximum political capital from the strengthening of the recovery this year.
Though the new forecasts from the independent Office for Budget Responsibility are unspectacular, 1.4% this year, 2.4% next year and 2.2% in 2015, they represent a significant improvement, particularly for the first two years, compared with the OBR's previous forecasts (0.6% in 2013 and 1.8% in 2014). This was, according to the Treasury, the biggest in-year upward revision for 14 years.
And if the OBR has been over-cautious - it predicts a slowdown in quarterly growth to just 0.5% during 2014 (broadly trend growth) from 0.8% in the third quarter - the chancellor will not mind too much. Better to present upward revisions than downward ones.
For similar reasons the chancellor will not be too dismayed by the OBR's cautious short-term forecast for public borrowing. A prediction of £111 billion this year for adjusted net borrowing looks high, though the rolling monthly numbers did benefit from some front-loaded effects.
But the big picture, which is where the politics comes in, is that Osborne has transformed himself from a chancellor struggling to meet his borrowing targets to one who has just shaved more than £70 billion off cumulative borrowing over the next five years, and intends to achieve a budget surplus over the medium-term (the OBR says by 2018-19).
In a year's time, parliament will vote on a tougher charter of fiscal responsibility, intended to enshrine falling debt and tough spending controls. The Treasury has issued a comparison of government debt on the assumption of a 1% budget surplus and a 2% deficit (the average in recent times). On the former, debt gets back down to 40% of GDP over time. On the latter it does not.
There's a lot more in the autumn statement, much of it in the detail. But the broad message is that growth is here to stay and borrowing will never again be allowed to let rip. Time will tell whether that will prove politically popular enough to give Osborne the chance to see it through. The coalition thinks it will. The main autumn statement document is here.
Many economists expected the purchasing managers' surveys to moderate in the fourth quarter following their very strong third quarter but they remain very strong. We await the service sector number but both manufacturing and construction has surprised on the upside ths month.
This was this morning's contruction PMI: "November data pointed to another strong upturn in the UK construction sector, with output and employment both rising at the sharpest rate since August 2007. Growth of business activity was broad based across the three main areas of construction, with residential building again the best performing category. Higher levels of output were supported by the joint-fastest expansion of incoming new work since September 2007.
"Adjusted for seasonal factors, the Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI®) registered 62.6 in November, up sharply from 59.4 in October."
It followed yesterday's buoyant manufacturing reading: "November saw the already solid upturn in the UK manufacturing sector gain further momentum. At 58.4, from an upwardly revised reading of 56.5 in October, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) rose to its highest level since February 2011. Moreover, the PMI has signalled expansion for eight months running.
"The improved performance of the sector largely reflected substantial increases in both manufacturing production and new orders, with rates of growth in both at, or near to, 19-year highs."
Good, and surprisingly strong, news.
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
George Osborne’s autumn statement this Thursday could have been very different. The chancellor might even have been struggling to hang on to his job.
A few months ago the vultures were hovering over Britain’s economy, ready to swoop on the dead body of the recovery.
In what turned out to be one of the most poorly-timed interventions since 364 economists attacked the Thatcher government in 1981, just as recovery was getting going, Olivier Blanchard, the International Monetary Fund’s chief economist, warned Osborne he was “playing with fire”.
A year ago even respected bodies like the Institute for Fiscal Studies warned Osborne’s deficit-reduction strategy risked turning into a deficit-increasing strategy.
Public borrowing for 2012-13 of £135bn, which the IFS feared, would have been a huge setback. Instead it was £115bn. The deficit is falling and the Office for Budget Responsibility (OBR) will say it is falling a little more rapidly than it predicted in March.
I think this year, 2013-14, will see the first deficit in double instead of triple figures since 2008-9 (when it was £99.5bn), though the OBR may not go so far.
Had growth not materialised, Britain would have been the poster boy for the fashionable debate about whether Western economies are suffering “secular stagnation”. This, permanently weaker long-run growth, has been popularised by Larry Summers, former US treasury secretary.
In its most recent e-mail poll, finalised on 25th November, the Institute of Economic Affairs (IEA) Shadow Monetary Policy Committee (SMPC) decided by seven votes to two that Bank Rate should be raised on Thursday 5th December.
Four SMPC members voted for a ¼% increase, three members voted for a rise of ½%, and two wanted to leave rates unaltered. This pattern of votes would deliver an increase of ¼% on the usual Bank of England voting procedures.
There were two main reasons why a majority of the SMPC thought that it was now necessary to start a gradual and phased process of raising Bank Rate towards a more normal level. One reason was the feeling that the hyper-low interest rates appropriate in the ‘lender of last resort’ period some half-a-dozen years ago were no longer required. In addition, it was feared that such abnormally low rates of interest were encouraging financial and property speculation at the expense of savers and genuine wealth-creating investment and damaging potential growth in the longer term.
A second reason for wanting a rate increase was the strength shown by recent business surveys and the official growth figures. The SMPC poll was largely completed before the release of the second estimate of third quarter UK GDP on 27th November. However, this showed unrevised quarterly and annual increases of 0.8% and 1.5%, respectively. The two main reasons for wanting to hold rates were the belief that there remained ample unused capacity in the domestic economy and concern that the problems in the Eurozone had abated – but not been resolved – leaving a potential threat to UK export demand and activity.
This is the relevant part of Mark Carney's opening remarks in launching today's Financial Stability Report:
"Housing activity has picked up from a low level and prices are 7% higher than a year ago. Price increases are gaining momentum and broadening out around the country. Valuations, while below levels reached in 2007, are high by historic standards and are likely to rise in the near term.
"The immediate threat to financial stability from these developments is mitigated by the higher quality and levels of capital at banks and building societies as well as by material improvements in underwriting standards since the crisis.
"Risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness. These risks would be amplified if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles.
"As part of a graduated response, the FPC is acting in concert with other authorities to implement a package of measures to guard against these risks. Some of these measures are already in train; others are new. Collectively, they are significant. But they are not exhaustive: in today’s FSR, the FPC outlines a wide range of additional steps that it could take in future, should they be necessary to meet its statutory objective to ensure financial stability."
The message is that the Bank will not allow a housing bubble to develop. The fact that this action has been taken should reduce the need for higher interest rates. The opening remarks are here, and the full report here.
Business investment rose by a modest 1.4% in the third quarter, within a similar rise in overall investment. A small step in the right direction but investment remains well below pre-crisis levels. Third quarter GDP was unrevised at 0.8%. More on investment here.
Today I was awarded economics commentator of the year in the Editorial Intelligence Comment Awards. The other short-listed candidates were Tim Harford and Gillian Tett of the Financial Times, both excellent, showing that this was an award worth winning. More here.