The Autumn Statement – “Steady As She Runs Aground.”
December 4, 2014
by Martin Odoni
You’ll have to bear with me as I write this. I have a sore neck. Probably from shaking my head so much. You see, yesterday George Osborne, Britain’s peerless mastermind of economic theory, delivered his final Autumn Statement of the current Parliamentary term. (Why he would be delivering an Autumn Statement as late as December would perhaps be an interesting question, but seeing it’s the work of a Chancellor of the Exchequer who doesn’t even know his 8-times table, or what is up and what is down, his lack of seasonal knowledge is probably the least of our worries. Missing a target as big as three months long is also, it has to be said, entirely consistent with his overall record.)
The detail of the statement was predictably full of self-congratulation for quarter-delivery on hopelessly optimistic promises made in 2010. The equally predictable attempts to make the recession of 2008-9 sound like a result of welfare spending and nothing to do with recklessness in the banking sector were also there. The mechanical references to a ‘long-term economic plan’ were there too, and as usual they appeared to mean, “Give me unlimited amounts of time, and when it finally goes right by accident, I can take the credit for it.” And of course, there were the usual, ridiculous cajolery tax-cuts for big business, in the hope that it will encourage them to hire more staff and invest more. (When will Governments learn to get that in the right order, by making business sector tax-cuts conditional?) So, more reward thrown at failure, and more punishment for people who had nothing to do with the financial meltdown in the first place. More of the same.
What was likely to be of more interest to most people was, given the proximity of the next General Election, the traditional ‘give-aways’ i.e. the shameless bribes that sitting Governments throw at the public in the hope it will give their vote-count a handy boost come May. The BBC, always cautious about putting the boot in when it’s a Tory Chancellor, tried to get its audience excited about announced changes to Stamp Duty, which in truth are going to be of very limited use to most of the country in the foreseeable future with house prices so dreadfully inflated. Air passenger duty is to be removed from under-12s, which again seems to be only of help to people who can afford holidays overseas, and then only for so long as their children agree not to be teenagers or older. VAT for air ambulances and hospices is to be refunded – laudable at first glance, but again, not likely to affect that many people. So in truth, not much to get carried away about.
All that was left of particular note therefore were the projections from the Office Of Budget Responsibility (OBR, or, to give it a more accurate title, the International Monetary Fund Britannic Echo-cell), forecasting the performance of the economy over the next five-to-six years. Now, I have stated before that I have severe doubts that the OBR serves any useful function at all, but its forecasts seem more than ever before to be entirely dependent on a mixture of luck and just taking Osborne’s word for it. From studying the bullet-point ‘calculations’ listed in the Executive Summary on page 12, there seem to be rather a lot of dangerous assumptions being made. In particular, it is assumed “that monetary policy will be able to support demand to achieve the inflation target and that the economy will be sufficiently flexible that the private sector can absorb the labour shed by the public sector.” Why that should be assumed is not terribly clear, especially given the hurried rate at which public sector staff have been axed, so quickly that the private sector keeps experiencing loss of business with the axed workers before it can hire enough of them to ‘cushion’ the blow.
There are a number of quiet admissions throughout the text of the report that reforms over the course of the Parliament have not had as much effect as was originally expected. For instance, on page 21, it is conceded that changes to incapacity and disability benefits will have less effect than predicted back in March this year. Well so much for OBR assumptions then. But that is all the Office seems to have – assumptions.
But the really unsettling part of the OBR’s projections is the discussion of Britain’s expected trade deficit with rest of the world up to 2019. The trade deficit currently stands at just over 5% (page 86-87), and the OBR expects this to be reduced to between 2% and 3% before the end of the next Parliament. However, where they get that from is again unclear, and in fact this seems rather at odds with other details in the report. The growth figures for the rest of the world are only projected to keep rising at any real speed until the end of 2015, peaking at around 4%, and then stagnating for the remainder of the UK Parliament’s next term. In the Eurozone, the outlook is slow too, the peak being a mediocre 1.6% growth from 2016 to at least the end of that term. So, seeing that exports, by definition, are sold to the rest of the world, and the rest of the world’s growth is not set to accelerate for long, how is this ongoing reduction in the British trade deficit going to be achieved? The rest of the world needs rising growth for the predicted extra exports to be affordable; it’s tricky to buy more without more money to buy it with. The only other way the deficit-cut can be done is through a reduction in imports to Britain, but the projected figures on page 93 show very clearly that imports are expected to increase consistently.
In other words, the OBR’s predictions sound like they are being made up.
This means that overseas trade is not going to improve British GDP enough. And with public sector spending poised to be slashed even more brutally in the next Parliament – about 60% of the cuts planned still lie in the future should the Tories get in again – we now need to ask where the increased growth can come from to fulfil the other optimistic prediction of the report; that the deficit will be gone by 2018 and the economy will be in surplus.
NB: I shan’t go into much detail here about how running an economy in surplus is a very risky exercise, but to put it briefly, it almost invariably causes economic slowdowns, even recessions, because even the strongest of private sectors will always have some market product that does not get consumed. A public sector deficit is merely the state’s way of making sure enough of this ‘slack’ is still consumed to prevent a profit shortfall big enough to cause widescale job-loss. If there is a surplus instead, that usually means there are a lot of private sector goods and services going unsold, making a lot of private sector workers look superfluous and expensive to their employers.)
Every time I look at it, the conclusion I come to is that, thanks to the wage repression that the Government has allowed, and even encouraged, the aim is to bring the rest of the growth about through more increases in private borrowing, in place of public sector borrowing. In many ways, it is a repeat of one of the uglier patterns of Tony Blair’s stewardship of the country. Average wages under New Labour only rose by about 14%, but the cost of living roughly doubled during that time, and so many people had to take out loans to cover the growing gap between the amounts they were earning and the amounts they needed to spend to keep things ticking over. The loans meant that the private sector could keep selling to the public and continue making solid profits, at least for a while. The problem was, without a large enough rise in their salaries, many of the people who had taken out the loans simply didn’t have enough to keep covering the repayments forever, and when enough of them defaulted at once, the Banking Sector suddenly choked and the 2008 Financial Crisis arrived.
Moronically, and with the OBR cheerleading them on, the current Government has now engineered an even more extreme repeat run of the same folly. Average earnings during the course of this Parliament have actually gone down, and many people are in zero-hours, insecure, temporary work. Once again, many are finding that supplementing their meagre incomes with loans is the only way to get themselves out of immediate danger. The problem is that, with wages not growing perceptibly for anyone outside the rich few, when these loans are due to be paid back again, once more, they will not be able to afford it. The average ‘household deficit’, for want of a better name, during the Labour years was about 1.5%, and see what that led to. According to the calculations of Alex Little on the ALittleEcon blog, the average ‘household deficit’ required for what the OBR currently anticipates would have to be about 3%! If it couldn’t work the first time around for half that proportion, how can it possibly work this time around?
The only possible path to avoiding 2008 Mk-II therefore is a pretty rapid and sharp rise in income for people on the bottom rung of the working ladder. The quickest way of achieving that would appear to be a substantial increase in the Minimum Wage. Such an increase would also increase the spending power of millions of people, increasing aggregate demand and thus increasing profits all across the private sector, thus largely paying for itself. But Osborne, of course, will never do that. He is convinced that increasing the Minimum Wage puts large numbers of people out of work and discourages employers from hiring. The fact that, for instance, Australia has one of the highest Minimum Wage structures anywhere on Earth, was only modestly affected by the world recession, and retains consistently high employment levels, might well put the lie to that. Osborne could even sweeten the pill a bit for businesses by offering them conditional tax-cuts in return for hiring more staff. But Osborne, of course, will never do that either. He is convinced that any Government interference in the private sector “hampers efficiency” (seldom defined).
Strange that, interfering in the actions of companies supposedly makes them less efficient. Interfering with employees and making them work for starvation wages supposedly makes them more efficient. With his clear intimation that more Austerity is all he has to offer most of us if he is still Chancellor by next summer, we can be sure that he will stand by his convictions, come-what-may.
Oh Gideon, Gideon, Gideon, what are we going to do with you? The more objects in your path you bump into, the more stubbornly you insist on walking in the same straight line. I wouldn’t mind, only you are dragging the rest of the country with you. Sooner or later, we are all going to… crash.