As soon as Theresa May said she was ready to ditch the deficit target I knew the game was up. Sure enough, a day later, George Osborne announced that he was abandoning the 2020 budget surplus target. A Brexit vote was always going to be fatal to the goal of eliminating the public deficit. It was tough enough even after the chancellor gave himself an extra year to do it. The weak economic growth and disappointing tax revenues forecast by the OBR in March made it look even more of a tall order. Now, with even the most optimistic projections showing that Brexit will do serious damage to the public finances, the 2020 deficit target is beyond reach. The flagship policy which has defined the Conservative Party for the last eight years and on which two election victories and the trouncing of the Labour party have been based, has been sunk by the Brexit vote.
None of that come as a surprise to me but the reaction of some on the left did. They seemed to be claiming this is some kind of victory.
Today Osborne has bowed to Labour pressure by scrapping his failed spending target https://t.co/Y1PsN63vya
— Jeremy Corbyn MP (@jeremycorbyn) July 1, 2016
That’s politics, I suppose, but make no mistake, George Osborne did not drop his cherished deficit policy because he suddenly realised the left had been right all along. He dropped it because the hit to the public finances from Brexit will be so big that even he won’t be able to brazen it out any more. Furthermore, the woman most likely to be his next leader made it quite clear she wouldn’t back him if he tried.
This isn’t a triumph for the left. It’s as much of a disaster for Labour as it is for the Tories. Another recession, or even, at best, more of a slowdown than we thought, means less tax revenue. That means less money for public services and social security. Sure, the government may borrow more than it might otherwise have done but it will only do so to plug a gap we didn’t expect and to forestall a recession that is almost entirely self-inflicted. Over the next few years, this will create more pressure on the public sector. Any thought of taking public spending back to what it was in 2010, which was always the left-wing mirror image of the right’s deficit pipe-dream, has gone from being highly unlikely to damn near impossible.
IFS Director Paul Johnson remarked:
We’ll have a few more years of more borrowing, but my guess is this is not the end of austerity, actually this means austerity will just go on for longer because we’ll probably have the spending cuts and tax rises right through the 2020s to pay for this.
In other words, if we get a Labour government in 2020, it will be in the fiscal doldrums too.
The pressure on public spending hasn’t gone away. The rising demands on public services, stubbornly high benefit costs, low productivity and low tax revenues are still there but the brutal arithmetic of public spending just got that bit worse.
Right now, I’d trade where we are now for where we were a couple of months ago. Growth chugging along at a lacklustre 2 percent for the rest of the decade and the chancellor pretending he is suddenly going to eliminate the deficit in 2020 but no-one really believing him, suddenly looks like a rather benign scenario.
It may be fun to laugh as George Osborne’s flagship sinks but there is no joy here for anyone, left or right. The next few years are going to be even tougher than we thought.
Reblogged this on sdbast.
I don’t think the various leave scenarios are credible, possible yes, probable no. Nobody really believes in austerity anymore except as some quasi religious punishment for the feckless. I’m much more interested in your cure for the deficit.
High benefit bills, low productivity, low tax take and high use of public services are not the trademarks of a booming economy close to full employment. Cutting spending exacerbates those problems and certainly won’t reduce either debt or deficit.
Soon it will become so clear that tackling the problems you list is the way to the deficit closing all by itself. Focus on the deficit in itself is setting the wrong target. Osborne got lucky before this was exposed.
what “various leave scenarios”? and how are they not credible compared to the current path?
My mantra, established over a few decades, is “look at what is in front of you.”. It sounds straightforward but so many people filter reality to fit their hopes and prejudices, and that is IMHO exactly what Remainers have done.
What is in front of us is an EU which uses every crisis to promote closer integration, which is locked into a downward spiral caused by a focus on eliminating deficits in each nation when this is structurally impossible, which has said loud and clearly that it is not open to reform, democratic or otherwise, and for the UK we have a chancellor who came to power in 2010 saying he would eliminate the deficit within 5 years, stood for power in 2015 saying he would eliminate the deficit in 5 years, and now says he has no hope whatsoever of achieving this.
The game is up. Rick has established in an outstanding series of excellent posts that we were going nowhere slowly. The population has understood this. Time to abandon this ridiculous experiment and rejoin the rest of the planet.
Perhaps we wouldn’t be in so much s**t if Brown the C**t had not smashed the economy and Labour had not let cheap labour flood into the country.
Gotta get the workers from somewhere. Brits are not breeding enough replacements, so get younger (better educated and trained) workers in from outside. And…the economy was smashed by those well-educated financial workers, as wiki puts it: “The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making”
Or…by people trying to get rich quick over the corpses of banking etc….not a G Brown in sight, until the corpses needed reviving….
So Gunner’ better get breeding fast to replace the EU workers going home……..and have a quick look at the pension liabilities of future generations on you way to the bed..
“Growth chugging along at a lacklustre 2 percent for the rest of the decade and the chancellor pretending he is suddenly going to eliminate the deficit in 2020 but no-one really believing him, suddenly looks like a rather benign scenario.”
No it doesn’t. It’s hitching a ride on a ship that’s sinking. How do you clear a deficit when you belong to a protectionist group that has an in-built structural deficit for everyone apart from one country and that one country does not accept its responsibilities?
Leaving the EU is the only chance we have of clearing the deficit. We can rebalance our economy and work towards balancing the books. This is what taking back control means. It means being able to take fundamental decisions about where we go as a country and being responsible for the outcomes instead of being handed down a set of rules from a higher authority that make it impossible to ever balance the books.
Dipper, we are listening: what plans do you have? What does rebalancing the economy mean, in practice?
Both George Osborne and Michael Gove have indicated government investment in developing the economy, so I think whilst the world is keen to lend us money for long periods at effectively % we should build infrastructure – transport mainly but also investing in industry. Leverage our massive trade deficit to work with manufacturers to build more stuff here. Develop our ability to trade overseas and work on trade deals with lots of other countries.
If it were that easy … All that costs money whilst we are in a difficult situation. The flip side of taking control is taking responsibility, and that means for a lot of people they are not going to be able to live a life on benefit doing nothing, so a lot of people are going to find themselves challenged to get a job – any job – to replace the imported workers we currently use. Pensions are an issue – we should abandon the triple lock as this has seen a 2% increase in pensions when there are more pressing needs, and people will have to work longer. Personally I would abandon the overseas aid commitment; 10Bill is now equivalent to 6 weeks deficit, and I think we can do better than feeding an unproductive and corrupt aid industry.
Rick has had many posts showing that the current numbers do not add up. The referendum in effect gives the government the mandate to make hard decisions that up to now there has been no mandate or perceived need to address.
@Bill40 is spot on in my ever so ‘umble view.
But Rick, surely you’ll allow me the tiny luxury of rejoicing in the demise of Osborne and his malign policy?
One big opinion hidden as fact in this piece is the supposition that Labour somehow want to be “vindicated” by the Osborne dropping his fiscal rule. This is far from the truth as anyone who has listened to John McDonnells speeches and HoC statements will know. What Labour want is an end to austerity, not to be “right”, but because the economy is sinking and it needs to be reflated desperately. JD has actually offered to support Osborne if he wants to put into place reflationary measures. This really is a new sort of politics, and we need to start understanding this. That is why Corbyn asked in PMQs if the fiscal rule would be dropped. It’s not about Yah-boo across the floor. This is a real crisis, and the UK has many structural problems that can’t be fixed with cuts. Labour are not celebrating Osborne’s realisation that his own rule is economic suicide, we are just hoping something positive and not ideologically driven will be done to relieve and not increase the pain we are all feeling. After all, reflationary polices are hardly new, they got us out of the massive slump after WWII.
Seen from abroad it is kind of funny, albeit in a rather dark sense of humor, to Watch how the UK citizens claim “to take their country back”, just to immidiately, and without any public discussion, hand the entire country over to a bunch of ultra rich oligarchs, led by an Aussie born American with a firm hold on the Tory Party and most of the Labour PM´s.
UK will never be able to balance its budget, if the ultra rich class is not forced to pay their part of the costs of running a society, and further forced to Invest in real jobs, support production of real goods, and in general just behave as a part of a common society.
It is evident, the UK financial elite is still focused on plundering whatever is left of your once extremely rich empire, how to pump up your fundamental infrastucture with debts, that can never be repayed, how to attract still more stolen money from the rest of the World to the Laundries of “the City of London”, how to postulate “Growth” with a Financial gambling, with next to no connection with the real world, utterly unable to engage in real investments.
Do you really belive the Eastern European populations loves the UK? Your wonderfull climate, the hospitality of the UK population, the lukewarm beer? No, they migrate to the UK, following the track of Money stolen from their homelands, as it is the only way left to earn a living. The track ends in the “City of London”, and consequently the UK is the logical destination of an Eastern European workforce, much better educated and much more motivated, than the UK population. In Poland a craftsman has a 4-5 years certified education, while a UK plumber hardly realizes the Laws of gravity or the logical effects of frost. The Eastern European workforce is simply more competetive, than a UK workforce, with still reduced education, and spoiled with the expectations of being part of a long gone empire.
In France every Citizen can take a train from Paris to Lyon ( some 500 km ) in 2 hours, at a modest fee, being able to work and communicate on the trip. Taking a train from London to Manchester, is not a real option for anyone.
The fundamental infrastructure of the UK does not serve its real purpuse. Since the glorious days of Madam Thatcher, your infrastructure is only aimed at making profits for a still smaller and still more powerfull group of ultra rich, with no responsebilities for the society.
If the population of the UK really wants “to take their country back” and balance your budgets, you have to regain the ownership of your fundamental infrastructure, including transport, energy, education and health, and pay for it to Work for you, and the common interests.
For the “Continental Europe” the Brexit can easily prove to be the greatest gift the UK population could possible give to us. Thanks, and good luck.
Thanks Sven. Always good to get a view from abroad. I saw this after I answered above and there is some common themes.
Your comments on Eastern european education match my experience at the graduate end. Its not just Eastern Europe either – at a bank I used to work at there were two Algerians who used to bring the tea trolley round in their smart waiters uniforms. Both maths graduates from the University of Algiers.
But is that what the UK should be? A kind of pan-European business area where smart people from all over Europe come to build businesses whilst the resident population are kept on large reservations, undereducated, low expectations, and a benefit system that makes seeking work pointless?
I agree with your last paragraph. The EU was never about the UK, and getting the fit right was a constant painful process of rebates, exceptions, opt-outs, each one given in the most grudging way. Well that’s all over now. You can get on with ever closer integration without having to have the UK constantly moaning. Enjoy!
posting here because there is nowhere else to put this.
this is doing the rounds and sums up so much of the debate https://twitter.com/Farhat_Khanim/status/748913045443899392
30 researchers, 7 Brits, 18 different nationalities (many non-EU). One the one hand, its great to have multi-national teams working together. On the other, where is the home grown talent? How does this benefit people with no prospects and low wages?
Difficult questions, ones of balance not outright good/bad.
George now recommending cut in Corporation Tax. His case dismantled by John McDonnell on the radio. He really is losing the plot. Someone needs to kidnap him and remove him from no 11 before he successfully brings about the armageddon he promised us before the referendum.
and another Leaver update.
What a thing, to be Farage. To have a dream for your country, however unlikely, to set out on it and twenty years later see it fulfilled. There can be very few people who, in their dotage, can look back on a record like that. But he blatantly hasn’t got the ability or personality to lead the migration of UKIP from single-issue protest group to a coherent political party. so the right decision from Farage to resign today.
Overall am very happy at how things are progressing politically. The upheavals in the two main parties and now UKIP are a clear sign that the politicians understand the scale of both the challenge and the opportunity, and the struggles we see are an essential part of building credibility and strength in the political system. Fighting for the UK will be hard, so we need to see people fighting successfully to get into the position to lead. Johnson has been found out, and so I believe will Gove whose appeal to be leaders sounded like an appeal to be the idealogical number 2 behind a proper leader to me.
Economists predicted poor outcomes for the UK but the one thing economists cannot predict is cultural shifts that occur that can have marked influence on outcomes such as growth. There is evidence that this is being addressed; Gove and Leadsom, free-market right-wingers both, have said things about what we need to do for the poorer members of society that would have been unthinkable a month ago. The referendum gives us the opportunity to confront some of the issues we have formerly swept under the carpet, and form the basis of a more dynamic country.
And I am getting some mischievous fun out of this:
I agree with this article. First part particularly strong.
Looks like the new politics of Jeremy Corbyn includes an old political skill of taking credit for something you had little to do with
“Success has many parents. Failure is an orphan.”