Tuesday, November 29, 2011
Osborne confronts his grim reality
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

Perhaps George Osborne had reason to be grateful to the OECD for its pre Autumn Statement forecast. Certainly he had reason to be grateful to his advisers for getting his growth measures, including credit easing for small and medium-sized firms and a planned additional 30 billion of infrastructure spending out there before the gloom descended.

For gloom there is in spades and it goes beyond mere growth revisions, though they were unwelcome. There were four aspects to the Office for Budget Responsibility's downbeat assessment:

* Growth in 2011 will be just 0.9%, compared with 1.7% in March, slowing further to only 0.7% in 2012, down from 2.5%. GDP is declining by 0.1% this quarter, rising 0.1% the next, but remaining subdued through 2012.

* The economy's productive potential is less than it was, meaning it will be 3.5% smaller in 2016 than the OBR thought in March. Every 1% of GDP is about 15 billion, so add it up. In total, the economy will be 13% smaller in 2016 than if the Treasury's spring 2008 forecast had been right.

* This has direct knock-on effects for borrowing. Public borrowing is revised up every year, from 122 billion to 127 billion this year (8.4% of GDP), and from 29 billion (1.5% of GDP) to 53 billion (2.9% of GDP) in 2015-16.

* Because more of the budget deficit is now thought to be structural rather than cyclical, Osborne only meets his fiscal target in 2016-17 - eliminating the current structural budget deficit, two years later than in March, and only does so by going beyond just a real freeze on spending in 2015-16 and 2016-17; cutting total managed expenditure by 0.9% in real terms each year; beyond the next election.

A few things to highlight the grim picture. This year's 2.3% fall in real household incomes is the biggest in the post-war era, and will be followed by a further smaller fall (0.3%) this year. There will be 710,000 public sector job losses by 2017 according to the OBR, compared with 400,000 to 2016 in March.

Not only that, but only by rolling his fiscal target forward does Osborne meet it. The original aim was to eliminate the structural budget deficit in this parliament. That will not now be achieved. These rolling targets are a moveable feast, as we discovered under Gordon Brown.

It is, of course, ridiculous to compare the pre-budget projections the OBR made in June 2010 with these latest numbers. Alistair Darling did his best in difficult circumstances from 2007 to 2010 and would have liked to have done a pre-election comprehensive spending review.

He was not, however, allowed to, so his "plans" were merely a sketch. He too, had he remained in office, would have been affected by highly unfavourable headwinds. We cannot know precisely what would have happened to debt and the deficit under Labour - it is possible a fiscal crisis would have forced even greater austerity. In the absence of that, however, borrowing would have been higher, Osborne, using Treasury (not OBR) calculations says cumulative borrowing would have been 100 billion higher under Labour.

That will not, of course, settle the "Plan A/Plan B" debate. One result of the Autumn Statement is that it will run to, and probably now beyond, the next election.