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.
Britain is basically settling into new normal of public debt at 80% of GDP – compares to pre-crisis normal of 40% pic.twitter.com/Y8OkPW4YZq
— Torsten Bell (@TorstenBell) November 22, 2017
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).
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.