THE Autumn Statement showed that George Osborne has failed to grasp the gravity of the economic crisis facing the UK. Urgent action was needed to brace the economy for double-dip recession and the fallout from the euro crisis. Instead, the chancellor announced a big increase in government borrowing, together with a series of measures that, while attractive to key groups of target voters, will do little to encourage growth.
Worse still, collapsing growth means the government’s deficit reduction plan is now in tatters. Government borrowing has been increased by £110bn over the next four years, meaning a staggering £350bn added to the national debt.
This may in fact be a best-case scenario. The Office for Budget Responsibility predicts slow growth of 0.7 per cent in 2012 but then assumes a healthy recovery, with growth rising to 2.1 per cent in 2013, 2.7 per cent in 2014 and a robust 3.0 per cent in 2015. But given the severity of the euro crisis, high levels of public and private debt, and the possibility of a downturn in overheated emerging markets, it is equally plausible that Britain will go into recession next year, followed by several years of stagnation.
A wise chancellor would be preparing for such a scenario. Vague talk of contingency plans does not pass muster.
A double-dip recession would decimate tax revenues while adding to welfare spending through higher unemployment. If UK GDP were just five per cent lower than predicted in 2015, for example, this would reduce the annual tax take by around £35bn.
Under such circumstances, with the budget deficit remaining unsustainably high, the chancellor cannot assume that the UK will retain investor confidence and continue to pay very low interest rates on its debt. With high debt and low growth there may be little to separate Britain from the struggling economies in the rest of Europe, such as Spain and Italy.
Given the severity of the potential risks, Osborne should have had the courage to announce further cuts – at least enough to return the deficit reduction plan to its original trajectory. He should also have taken far bolder steps to encourage growth, through radical deregulation and by rationalising the tax system.
He could, for example, have cut spending by uprating benefits rates in line with average earnings rather than inflation. Planned increases in foreign aid – deeply unpopular with a sceptical public – could have been abandoned at negligible political cost.
Instead, several new spending announcements were made, using money that could have been used to reduce government borrowing. Ill-conceived “credit easing” policies will mean taxpayers will guarantee risky loans to businesses and first-time buyers. Additional enterprise zones were announced, even though these subsidise firms to relocate to sub-optimal locations. An extra £1bn was found for the Regional Growth Fund for England, despite five decades of failure in regional policy and governments’ lamentable record at picking winners.
Much was also made of extra infrastructure spending: £5bn extra over the next three years plus significant additional investment from the private sector. Unfortunately, a high proportion of this expenditure is politically motivated and the economic returns will be negative. Loss-making public transport schemes will require ongoing operating subsidies, creating significant future liabilities for short-term political gain.
The counterproductive gimmicks were combined with almost a complete absence of policies to reduce burdens on businesses and thereby encourage growth. Osborne made some welcome statements on the need to liberalise planning controls, reduce the cost of employment law and simplify business taxes – but few concrete measures were announced.
In fact, current government policies are likely to work in direct opposition to many of the chancellor’s announcements. For example, new regulations forcing builders to produce expensive “zero-carbon” homes will dwarf the impact of special help for 100,000 first-time buyers. Indeed, Osborne recognised the calamitous impact of the government’s green policies when he announced subsidies for energy-intensive industries struggling to cope with spiralling costs.
The lack of action on deregulation is mirrored in tax policy. Several tax rates are now so high that they actually lower revenues by destroying incentives to work and invest. The Autumn Statement was a golden opportunity for Osborne to signal his intention to rationalise the tax system. In particular, a cut in the 50p rate of income tax would have increased tax revenues and sent a strong message to international investors that the UK offers a pro-business climate.
On this and other issues the chancellor proved too timid to step up to the challenge. He missed his chance to prepare the country for economic turmoil by cutting spending and removing key impediments to growth. It now seems likely his hand will be forced by events.
Dr Richard Wellings is deputy editorial director at the Institute of Economic Affairs. www.iea.org.uk