The problem is that we are now in a vicious debt spiral: on the Maastricht definition, the UK’s national debt will peak at 94 per cent of GDP in 2014-15, a dangerously high level that global studies have shown has a crippling effect on economic growth (it will hit 78 per cent on the government’s favourite measure). Britain’s national debt will be worse than that of Germany, France and the Eurozone; it will remain better than Italy’s, but that is no great achievement. Yet the more debt we get, the less growth we get and the more tax receipts disappoint – and therefore the national debt grows again. The answer should be to combine massive deregulation and supply-side reforms of the economy with radical spending cuts to break out of the spiral of decline. Tragically, while Osborne is clearly increasingly aware of the hole he is in, he decided to try and wing it, delaying his new found radicalism so much that it has lost most of its bite. He presumably didn’t dare try and explain to the public that we are all much poorer than we thought, which means that we simply cannot afford to spend so much, especially on public services.
Yesterday’s Budget from Osborne was thus a weird mix of neo-Brownite obfuscation, a shameless shifting of the fiscal goal-posts, tinkering, over-spun, not especially relevant projects, robust free-market rhetoric (unmatched by game-changing reforms), lots of silly corporatism, a few good but minor polices to incentivise new firms and (rightly) far more spending cuts – but only after the next election.
His plan to boost youth jobs via subsidies to firms was superbly destroyed by the OBR, which rightly sees it as a costly way of shifting jobs to the youth at the expense of older workers while doing nothing to create extra jobs overall. There was some good stuff on deregulation; and the chancellor is right to seek to tap pension funds to finance infrastructure (though that will often mean money being reallocated out of equities).
But if there is one man on earth who can talk the austere talk while blazing an almost Keynesian path, it is Osborne. For all his righteous indignation at those who would seek to borrow the UK out of a debt crisis, he is doing just that. The national debt will increase by 61 per cent during this parliament, even more than the 60 per cent that his predecessor Alistair Darling was planning (and which began to panic the markets at the start of 2010). The government’s net debt will jump from £905.3bn last year to £1.515 trillion by 2016-17; the increase is £112bn larger than predicted in March. In just eight months, the situation has deteriorated disastrously; another such slippage – caused, for example, by a crisis in the Eurozone – could be lethal for Britain’s prospects. Osborne’s target of eradicating the structural deficit by 2015-16 will be missed; his attempt at redefining his target as a rolling one – which would mean that the balanced budget year would always be five years away, and therefore meaninglessly elastic – deserves to be laughed out of town. As a result, the planned total fiscal tightening during 2010-11 and 2011-12 has fallen from 4.5 per cent of GDP to 3.5 per cent of GDP in the new forecast.
The Office for Budget Responsibility expects GDP growth of 0.9 per cent this year and 0.7 per cent in 2012. These forecasts have the virtue of being realistic, although it is evident that the Eurozone crisis poses major downside risks. GDP growth of 2.1 per cent in 2013 looks just about achievable – but growth of 2.7 per cent in 2014 and 3.0 per cent in both 2015 and 2016? Forget it. These are ridiculously over-optimistic numbers, with or without a Eurozone implosion. There is far too much private sector deleveraging to do and the economy is too tied up in red tape and incentive destroying taxes. The OBR is wrong to believe that the trend (sustainable) growth rate the UK can aspire to will increase from a depressed 1 per cent this year to 2 per cent by 2012 and 2.3 per cent from 2014. This is unrealistic, partly because productivity is bound to remain low in the public sector, which means that the economy in 5-6 years’ time is likely to be smaller than what the OBR hopes for, and the deficit even larger.
The best part of Osborne’s budget was his acceptance that cuts will have to be much greater. Total expenditure will be cut by 0.9 per cent a year in real terms in 2011-12, 2012-13, 2013-14 and 2014-5, adding to 3.4 per cent, roughly as previously planned. But there will then be two more years of cuts, both conveniently pushed back to after the election: a 1.1 per cent drop in spending in 2015-16 and a further 0.9 per cent drop in 2016-17. The new plan is to cut spending by a total of 5.3 per cent, in a partial and belated realisation that years of over-spending have given us an unaffordable state sector and that our knackered economy will require more, not less austerity – but the reductions are spread over six years, which is an eternity in politics as well as in real life. Will they really ever happen? It would have been better to accelerate them drastically, take the sharp pain and then move on. Cynical investors will also doubt whether Osborne really wants to cut that much – or whether, like Brown, he would rather pass on a massive deficit black hole to his successors.
Public sector job cuts will hit 710,000, far more than previously expected; pay hikes will be capped for state workers for another two years (given that the 50p tax rate won’t be abolished until these pay restraints end, that presumably means it will be retained permanently). While it is always sad when people lose their jobs, many of these public sector cuts will come through natural attrition – and crucially, it is necessary to reduce the size of the government workforce, which spiralled out of control under the previous government. Even after all the cuts, the state will directly employ more people than it did under John Major. If all goes according to plan, total employment will rise by around 1.7m between the start of 2011 and 2017, with the private sector creating 2.4m extra jobs. The problem, of course, is that all these predictions are based on pie in the sky economics: if the Eurozone does go pop, and implodes in a messy, uncontrolled manner, all bets are off. It is because this risk is so high that Osborne should have had the guts to be more radical. He didn’t – and so his fate and ours is now in the hands of powerful economic forces that nobody can possibly control.
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