Cold comfort budget

Budget Day is a lot less exciting than it was under George Osborne. Gone are the 31 percent cuts to day-to-day public service spending and the incredulous response from, well, anyone who knew anything about public spending. Gone too are the confident assertions that the total elimination of the public deficit could be achieved in four years. No more insistence that the deficit could be cut at the same time as taxes without damaging public services. No more ‘Back to the 1930s‘.

The most interesting thing that happened yesterday was the publication of the Office for Budget Responsibility’s economic and fiscal outlook. As expected, this downgraded the GDP forecast from poor to utterly dire.

Even by the standards of recent years this is bad. It’s the first time that the OBR’s GDP forecast has been under 2 percent for every year. Half a decade of per capita GDP growth at less than 1 percent would be unprecedented in the post-war period.

So what has caused this downgrade?

Mostly the OBR’s re-evaluation of the UK’s productivity prospects. After years of expecting productivity to recover from its post-recession shock, the OBR has concluded that the UK’s low productivity may be set in for some time.

The report comments:

As the remarkable period of post-crisis weakness extends – and as various explanations pointing to a temporary slowdown become less compelling – it seems sensible to place more weight on recent trends as a guide to the next few years. But huge uncertainty remains around the diagnosis for recent weakness and the prognosis for the future. We have assumed that productivity growth will pick up a little, but remain significantly lower than its pre-crisis trend rate throughout the next five years.

Now it’s worth noting here that the OBR hasn’t written off productivity growth completely; it just thinks that the growth, when it comes, won’t be as strong as previous forecasts indicated. Should productivity growth disappoint even against this modest expectation and continue to bump along at the post crisis average, then we are looking at an even lower growth forecast but let’s not go there for the time being!

The upshot of all this is that the deficit reduction target has been kicked down the road. With forecasts like these even George Osborne couldn’t have brazened it out. A mere 19 months after George’s final budget, no-one is talking about eliminating the deficit in the near future. 

Chart by Resolution Foundation

As Torsten Bell said, this implies the acceptance of public debt remaining at around 80 percent of GDP. On current trends, it will be 2031 before the public finances are in surplus again. The bogeyman of public debt, on which two elections were won and lost, has disappeared over the horizon.

 

Does this mean that austerity is over then?

At first glance it might look that way. The government plans a 33 percent increase in per capita capital spending over the rest of this forecast period. It is also easing off slightly on the cuts to day-to-day public service spending (RDEL).


Look a little more closely though and much of this is accounted for by an extra £3bn for the NHS and an extra £3bn to prepare for Brexit.

Of the scorecard RDEL measures, the largest increases relate to 2018-19 and 2019-20, where a cumulative £3 billion has been allocated to Brexit preparation and another £3 billion for the NHS. The 2019-20 ‘efficiency review’ announced in Budget 2016 has also been scaled back. These measures explain most of the total increase in RDEL spending in those years.

In other words, there isn’t much to ease the pressure on other government and local authority services.

On social security there is also a slight easing, for example, removing the waiting time for Universal Credit but, as the Resolution Foundation says, the impact of this is dwarfed by the policies of the 2015 budget.

Figure 28 shows how the overall impact of measures announced before Autumn Statement 2016 are set to be far greater than the impact of those announced since. When it comes to tax and benefit policy George Osborne is basically still the Chancellor. These earlier policy announcements are set to leave the poorest third of households an average of £795 a year worse off, barely offset by a total mean gain of £75 a year in scal events since (including £35 a year from yesterday’s Budget). That compares to a mean gain of £210 a year for the richest third of households pre-Autumn 2016 and a net mean loss of £25 a year in measures announced since.

To sum up, then, the deficit elimination target has been kicked so far into the future as to be meaningless but the pain associated with it continues. The economy is so weak that we must keep borrowing and still keep cutting. The public debt is likely to stay where it is, relative to GDP, for some time.

Of course, the OBR could be wrong. Having been over-optimistic in the past it might be over-pessimistic now. That said, if the OBR has under-estimated the impact of Brexit on trade, productivity and public finances, things might be that much worse. When the economy is about to experience a shock, even the OBR’s modest productivity predictions look a tad optimistic.

I remember in 2011, people I know in the public sector talking about things ‘getting back to normal’. In other words, they expected a short, sharp shock of austerity and budget cuts followed by a return to business as usual in a slightly slimmed down organisation. They are not saying that now. Here we are six years on and things are looking as grim as ever. We are told we are on the way to sunlit uplands but when we get there, I fear the light will be cold and glittering.

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13 Responses to Cold comfort budget

  1. Dipper says:

    “Of course, the OBR could be wrong. Having been over-optimistic in the past it might be over-pessimistic now.”

    Well, this is the nub of it. The OBR downgrading their forecast for productivity and growth doesn’t mean that productivity and growth are suddenly going to drop, it simply means the OBR have given up the pretence that they have a clue what is going on and have instead said if nothing changes then nothing changes.

    This is quite momentous. It marks the end of an era when technocrats thought their tweaking and fiddling could deliver anything meaningful. It is clear now that growth has to come from structural changes in how the economy functions. More skills, more infrastructure, more joined up industrial and business efforts.

    I’m very happy with this forecast. It feels like at last we are looking at reality not the smoke and mirrors of clueless self-important economists. This is a necessary first step.

    • P Hearn says:

      Could not agree more, Dipper.

      The only thing that’s come true is the forecast that we’ve had enough of experts. The slum tower blocks of the 60s and 70s already proved that, but this bunch of Herberts at the OBR has proved predicting the future is best left to Ladbrokes and Nostradamus.

      The UK is now forced to face some productivity reality. The unlimited supply of cheap immigrant labour will no longer necessarily be there. The alternative of automating and employing some capital instead of people will now get an outing.

      As the Economist wrote at the start of the year, (https://www.economist.com/news/britain/21714364-some-will-hire-more-britons-or-robots-others-may-up-sticks-british-firms-prepare-future), this is going to shake things up.

      I was in a car factory in Oxford a couple of weeks ago, where 133 people produce 500 car bodies per shift. They do this with the assistance of 1200 robots, and there’s still scope to automate more. Whilst important, the cost of labour is secondary to the cost of energy and the availability of brains to keep the robots working.

      The Germans have shown us how to do it. They learned it from the Japs, who learned it from the Brits in the 1950s. Each has improved considerably on the last, and it’s now our turn again.

      I look forward to a future where we don’t celebrate raw employment numbers, but GDP per capita instead. Then we might be getting somewhere.

      • gunnerbear says:

        “I look forward to a future where we don’t celebrate raw employment numbers, but GDP per capita instead.”

        No version of HMG is going to go for that – they’d have to admit that letting vast amounts of dross labour has done nothing for most of us.

    • gunnerbear says:

      “It is clear now that growth has to come from structural changes in how the economy functions. More skills, more infrastructure, more joined up industrial and business efforts.”

      Perhaps, flooding the country with cheap labour rather than investing in skills in training was a bit of a f88k-up by assorted versions of HMG.

  2. Keith says:

    dipper is full of shit, as usual. The tory mess has no solution without ditching dippers tory mates.

    • Dipper says:

      Keith has simply run out of coherent arguments and is reduced to throwing infantile insults. Productivity stopped growing well before the Tory government.

      No doubt soon Keith will get his way and with Corbyn in power we can look forward to the soaring living standards currently being enjoyed by the people of Venezuela.

      • Woodsman says:

        Dipper: “Keith has simply run out of coherent arguments…”

        then…

        “…with Corbyn in power we can look forward to the soaring living standards currently being enjoyed by the people of Venezuela.”

        Talk about infantile arguments. Really, Dipper, I’m sure at some point you used to be better than this.

        • Dipper says:

          It is not an infantile argument. Corbyn and supporters repeatedly praised Venezuela under Chavez and Maduro. As living standards and political rights have collapsed they have failed to retract their former praise. I think I am doing the nation a service by reminding people of this at every opportunity.

          “I’m sure at some point you used to be better than this.”. You Are wrong. I was never better than this. No-one was ever better than this.

    • gunnerbear says:

      Throwing open the doors of the UK to all and sundry dropped anyone not at the pile, right in the s**t.

      Firms were allowed to suck up cheap foreign labour rather than being made to train UK workers.

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