I will make just five predictions: first, that the Eurozone and European Union will look very different to today in one year’s time, triggering a series of political crises, including in the UK; second, that the credibility of fiat, paper currencies will be put under maximum pressure as central banks roll out the printing presses, eventually rattling investors and the public; three, that massive deficit financing (the UK is borrowing £122bn this fiscal year) and quantitative easing (the bank of England is adding an extra £75bn at present) will not have any discernible impact on demand; four, that George Osborne’s growth plan will only modestly help the economy; and five, that quasi-stagnation will be the best the UK, Eurozone and US will be able to hope for next year. It is hard to be any more precise than that. I envy the OECD, which is brave enough to predict that the UK and Eurozone are set for a double-dip recession.
Today’s Autumn statement from George Osborne – to be delivered at lunchtime – will be interesting but will have less of an impact on Britain’s performance over the next few years than the fate of the Eurozone. The latest policies to emerge are an extension of taxpayer-funded childcare for 260,000 children (a policy reminiscent of one mulled but never delivered three years ago by Gordon Brown); a (welcome) extension of the business rate holiday on tiny firms; a seed enterprise incentive scheme; and a likely extension of pay restraint on the public sector for at least an extra year (see page 1 for our story).
The infrastructure and deregulation plans are good news but insufficiently ambitious; a few billion in extra private sector capex spending will make little difference to an economy the size of Britain’s.
There will be much boasting about the “safe haven” dividend from lower gilt yields, reducing the UK’s interest on recently-issued national debt – even though it could all vanish if the crisis intensifies and from now on, whenever yields go up, even momentarily, Ed Balls will be able to claim that the dividend has just been cut.
The OECD thinks the UK’s structural (cyclically adjusted) deficit is 7.5 per cent of GDP in 2011, worse than any rich country apart from the US. The Office for Budget Responsibility’s verdict this afternoon is likely to be pretty grim too: it last projected the structural fiscal deficit at just 3.7 per cent of GDP in 2012 and 2.0 per cent of GDP in 2013, which sounds naively over-optimistic today. Citigroup calculates that the OECD’s own estimate is 2.8 per cent of GDP (£44bn) worse for 2012, and 3.2 per cent of GDP (£52bn) worse for 2013. These projections put a £50bn hole in the UK’s fiscal outlook.
The UK’s structural problems are entirely self-inflicted; but its cyclical ones are not. As Sir Mervyn King rightly put it yesterday, the bulk of the reduction in growth is being caused by the Eurozone’s woes. America too is rattling the world: last night, Fitch put the US on negative watch. It is going to be grim, not just today or tomorrow, but for a long time to come.
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