The Autumn Statement leaves us walking a debt tightrope
Osborne’s growth plan simply wasn’t bold enough. More effort should have been diverted to ensuring the conditions for broad job creation
The OBR’s report yesterday was largely as expected. The economy will grow more slowly than previously forecasted in March, with growth estimates revised to 0.9 percent and 0.7 percent for 2011 and 2012, from the Budget forecasts of 1.7 percent and 2.5 percent earlier this year. Unemployment will continue to rise until the end of 2012. And central government debt will be £145 billion higher across the Parliament.
Given that such a gloomy outlook was widely expected, the Chancellor needed to use yesterday’s Autumn Statement for two ends. First, he had to maintain market confidence in his plan to eliminate the deficit. But equally importantly, he needed to show a determination to removing barriers to growth within his deficit reduction framework.
Whilst the decisions he made yesterday are unlikely to result in market panic, he was less than convincing on either front.
As you all know, George Osborne set himself two fiscal rules upon the release of his Emergency Budget in 2010. The first was to eliminate the structural deficit within five years.
Most interpreted this as to eliminate it by 2014/15. But this target has now been re-branded a ‘rolling’ target, meaning the Chancellor has until 2016/17 to achieve his goal –exactly when the target is now forecast to be met.
What does this actually mean? Well, lower forecast growth through this Parliament will mean lower government revenues than expected. But rather than reducing spending by a corresponding amount to eliminate the deficit, the Chancellor instead is taking the easy route: sticking to his spending plans and waiting for revenues to make up the difference when growth is higher two years later.
The end result, of course, is more debt –over £100bn in fact - which is particularly dangerous given that all of yesterday’s forecasts are based on the assumption that the eurozone sorts itself out. If it doesn’t, and leads to a recession here, then Osborne will severely regret not taking pre-emptive decisions on spending. Worse, the markets could very quickly start to question our ability to pay our debts.
Of course, all this wouldn’t matter if we could significantly improve our growth rate. But on yesterday’s evidence, that’s looking unlikely.
The credit easing proposals are still shrouded in mystery. We know how much is being committed (£40 billion) but have little idea how it will reach small businesses in reality. Likewise, whilst shifting £5 billion in the next three years from current to capital expenditure for infrastructure projects is welcome, there are still no details as to how or how quickly pension funds will commit to funds and how projects will be approved.
Equally important were things that weren’t addressed. There were no moves on taxes, despite us having the 94th ‘most’ competitive tax system in the world. And the job-destroying carbon price floor, due to be implemented in 2013, somehow came out unscathed.
The harder the times, the greater the temptation for any Chancellor to indulge in initiativitis. A few hundred million quid can be thrown at a particular region or demographic group and the headlines can be dissipated. Yesterday, the Chancellor committed to spending over £10 billion on these sorts of initiatives – an amount that could have been used to reduce Corporation Tax rates to Irish levels!
Osborne’s growth plan simply wasn’t bold enough. Whilst there were welcome moves to ease the burden on drivers and some working families, more effort should have been diverted to ensuring the conditions for broad job creation.
The acceptance of a higher government debt burden, coupled with an unwillingness to tackle our uncompetitive tax/regulatory and energy policies suggests that the Government is still not doing all it can to enhance national prosperity.
The saving grace for us is that it would be far worse under Chancellor Balls.
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