Sunday, December 02, 2012
Can Osborne press the growth button?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The coming week looks much tougher for George Osborne than the one just gone, assuming he does not have a Mark Carney rabbit to pull out of the hat in Wednesday's autumn statement.

One day the chancellor will stand up and tell the Commons he was too pessimistic last time and, accordingly, can revise his growth forecasts up and his borrowing numbers down. That day, sadly, will not be next Wednesday’s autumn statement.

In his March budget, growth was supposed to be 0.8% this year and 2% next. Lop a percentage point off those numbers and you have something like the new forecast.

Will he have to abandon one of his fiscal rules, for debt to be falling as a percentage of gross domestic product by 2015-16, the end of the parliament? The Treasury, I sense, has been braced for exactly this verdict from the Office for Budget Responsibility (OBR).

The Institute for Fiscal Studies, where OBR chairman Robert Chote resided before taking on his current job, said a few days ago that even on optimistic assumptions debt was likely to be rising as a percentage of GDP in 2015-16.

But it concedes the possibility emerging from City economists, that a combination of financial jiggery-pokery (the transfer of quantative easing interest proceeds to the Treasury from the Bank), asset sales and shifting around some spending, Osborne might yet convince the OBR he has a better than 50-50 chance of meeting his rule. That one is worth watching, though I think the Treasury agrees it would be daft to expend too much energy meeting a not very sensible rule.

The bigger question, of far more relevance to most people, is what he can do to boost growth. The 1% rise in GDP in the third quarter, confirmed in revised figures last week, has almost been forgotten in the autumn gloom, though November also brought strong retail sales according to the CBI, and a rare jump in consumer confidence, as measured by GfK-NOP.

The GDP figures, and a pocket calculator, also showed where the economy needs most help. Compared with where we were before the start of the 2008-9 recession, overall GDP is 3.1% down. Nearly five years on from that pre-recession peak in the first quarter of 2008, there is still work to be done just to get back to where we were.

There is, however, a big difference when it comes to the performance of different parts of the economy. The service sector is back above pre-recession levels, if only by a modest 0.4%. But manufacturing is down by 8% and construction a huge 18.3%.

Looked at by categories of spending, the biggest casualty is investment, down a massive 18.8% on pre-crisis levels, with business investment more than 10% down. Exports are modestly up, by 2.3%, while imports are 3.9% down. Consumer spending is nearly 5% down but may be starting to mend.

Government spending (excluding capital) is, continuing last week’s theme, up 6.7% on pre-crisis levels. All these figures are inflation-adjusted.

That tells me where the chancellor’s priorities should lie. The service sector is coming through the worst. It, and consumers, can look after themselves and they will get a bit of help from the expected postponement of the 3p a litre fuel duty hike on January 1.

That leaves manufacturing and construction as the sectors where the help is most needed, and it leaves investment - private and infrastructure - as the best way to deliver that help.

Talking the other day to John Cridland, CBI director-general, just back from a trade trip to Russia with medium-sized firms, I found him refreshingly optimistic about the outlook for Britain’s manufacturers.

He thinks they are shifting away from reliance on the European market, and this is supported by the data. But he also thinks there are things the chancellor can and should do to assist, while keeping its fiscal strategy on course.

In the last fiscal year, 2011-12, the government underspent by £1.6bn even its own scaled-back targets for capital spending. Next year it can expect £4bn from the sale of the 4G mobile phone spectrum. That only scratches the surface of the £700bn of assets, some of it unused land and buildings on prime sites, the Treasury could sell to fund an investment programme.

The CBI is not advocated a rushed “selling the family silver” type disposal, but it does think the chancellor has scope, to the tune of £1.5bn, to do something modest now building up to serious numbers later.

Some of that £1.5bn could be put to work on an accelerated programme of road repair and maintenance. Limiting next year’s rise in business rates to 2% would take some pressure off firms. Doubling the annual investment allowance from £25,000 to £50,000, could tip the balance in favour of investing now for hundreds of thousands of small and medium-sized firms, at a cost of just £330m.

The CBI is not the only body to have its eyes on an investment boost this week. The EEF, representing manufacturers, points out that Britain has the least generous system of capital allowances than any OECD country except Chile.

It wants time-limited 100% capital allowances, for two years, to jump-start investment, and points to the success of similar initiatives in America and Canada.

What about construction? The prize remains that of getting the big institutions, pension funds and sovereign wealth funds, investing in Britain’s infrastructure. Progress is being made on that but it is not fast enough. We should here more, however, on the government's infrastructure guarantees starting to have an impact.

In the meantime, the big frustration in the construction sector, and the wider business community, is that Osborne has cut capital spending much too hard, while the government’s current outlays have continued growing.

The chancellor may address that at the margin this week, as he has done before, though substantive action will have to await the next spending review, probably in a year’s time. With public finances tight, there is no room for big net giveaways.

That will leave Osborne open this week to the criticism that he is merely tinkering as the economy deteriorates. And if he does not give businesses some red meat to chew on, the danger for him is that they will join in with that criticism.