Sunday, November 26, 2017
Eeyore? We need reasons to be cheerful, amid the doom and gloom
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.

It is five days since Philip Hammond’s budget and, though you should never disregard the dangers lurking beneath the surface, it remains intact. Sometimes budgets unravel quickly but sometimes it takes a little longer. This one looks as though it has some staying power.

Most of it has been well covered. There was a housing package of mixed merit, to which one can say without hesitation will not deliver 300,000 new homes a year. There was some essential sticking plaster, for the National Health Service – suggesting the government has given up on the hope of big productivity and efficiency gains – and for as yet unspecified Brexit preparations and for universal credit.

Hammond will go down as the chancellor who, against the traditions of the election cycle, loosened policy after a general election, even though there was no real room to do so, a reflection of the government’s very weak position.

Even so, his was a serious-minded budget from a grown-up politician, which should help the government. If it followed by an agreement at the EU summit on December 14-15 that “sufficient progress” has been made to move on to trade, Theresa May’s government will end the year on a stronger position than it dared hope a few weeks ago, when cabinet ministers were falling like ninepins. A government that is stable, if not strong, will help business and consumer confidence.

The chancellor borrowed more yet was able to point to a faster fall in public sector debt – relative to gross domestic product – than in March. That was partly because of the reclassification of housing associations to the private sector, which takes their debt off the government’s balance sheet, and partly the decision to raise £15bn by selling most of the government’s stake in Royal Bank of Scotland. Hammond is often regarded as a sober accountant-type but he and his officials are nothing if not creative.

What I wanted to focus on today, however, was the Office for Budget Responsibility (OBR) forecast underpinning the budget. In the old days chancellors would devise their policies and mould the forecast to fit with it. These days it is the other way around. Some would say it means the tail is wagging the dog, but it is the modern way.

In covering the economy over more years than I care to mention, even in the darkest days, I have always tried to look on the bright side. When, in the years after the crisis, many said all hope was lost if there was no change in policy, I held out the hope of recovery, which was eventually fulfilled.

Now, however, it is quite hard to do so. The strong growth the eventually started to emerge four years ago was depressingly short-lived. Just when it looked safe to go back into the water the sharks started circling again. This was meant to be a time of far stronger growth and healthy business investment, and a recovery in living standards.

Apart from the much-flagged productivity downgrade, but related to it, the OBR has come out with a disturbingly downbeat forecast. If it is right then, with the economy slowing to barely more than 1% a year from 2018 to 2020, the economy will barely be registering a pulse.

As Paul Johnson, director of the Institute for Fiscal Studies, out it: “The forecasts for productivity, earnings and economic growth make pretty grim reading. One should never forget of course that these are just forecasts. But they now suggest that GDP per capita will be 3.5% smaller in 2021 than forecast less than two years ago in March 2016. That’s a loss of £65 billion to the economy. Average earnings look like they will be nearly £1,400 a year lower than forecast back then, still below their 2008 level. We are in danger of losing not just one but getting on for two decades of earnings growth.”

Two questions arise from this. One is whether, as some suggest, the OBR has overdone the gloom. The other is whether, faced with such a gloomy outlook, the chancellor should have done more.

Forecasts are forecasts and nobody would be more surprised that Robert Chote, the OBR chairman, if these latest forecasts – the gloomiest in living memory – turn out to be right. But if the OBR has been at fault in recent years it has been to be too optimistic rather than too pessimistic about the economy. Its post-referendum forecast for growth this year, 1.4%, will turn out to be closer to the outcome than the upward revision to 2% it decided on in March. The latest forecast, for a year that is almost up, is 1.5%.

The ingredients for slower growth, feeble growth in real incomes constraining consumer spending and uncertainties holding back business investment, are in place. The OBR is rightly cautious about a sustained export boom.

There is also the fact that slap bang in the middle of the forecast period is an important fork in the road. In one direction there is a chaotic, no-deal Brexit, which the trade credit insurance provider Euler Hermes predicts would lead to outright recession in Britain. On the other is a smooth transition to a good Brexit deal, under which the damage to the economy would be minimised.

For forecasters, this is classic territory in which you hope for a good outcome but have to allow for the risks of a bad one, and in which the risks are skewed to the downside. This is not an environment in which any forecast would want to be stuck with a prediction of strong and untroubled growth.

Should Hammond, faced with such a subdued outlook, have done more to boost the economy? As with the Bank of England, the Treasury view appears to have been that, while the budget provided targeted help, and added up to a £25bn fiscal relaxation over five years, the government could never fully offset the negative impact on growth and living standards of the Brexit process.

Indeed, to have thrown much more money at it, at this stage, would both have smacked of panic and suggested a chancellor and a government prepared to drop its fiscal targets at the sound of gunfire. The balance was about right.

The fundamental challenge remains, which is that of reviving Britain’s supply-side. As the Treasury put it in the budget “red book” on raising productivity: “Evidence suggest the UK should prioritise upgrading infrastructure, improving skills, helping businesses to invest and improving the housing and planning systems.”

It claims that the budget measures were “a significant step” towards improving productivity, “in order to boost wages and enhance people’s living standards”. There were some moderately useful measures. Many more steps will, however, be needed. This is one for the long haul.