Osborne’s half-term report
| Tuesday, December 04, 2012
Budgets are more politically than economically significant. Some fancy financial juggling creates the illusion of activity – a tax here, a hand-out there – and the media decides the winners and losers. The economic trajectory of the government remains unchanged. This time motorists may be the winners with a fuel tax cut; the government will have to find a set of losers less vocal than pasty-eaters.
But this Autumn Statement is also the government’s half-term report. Two and a half years into George Osborne’s chancellorship, the failure of his economic strategy is plain to see. The OBR has consistently predicted growth higher than independent forecasts, and consistently been proved wrong. Their report will confirm what was already apparent: the UK economy spent 2012 treading water, and will make only slow progress in the future. There are already signs that the prolonged stagnation has permanently lowered potential growth; tax receipts are below even what would be expected in an economy hit by recession. The question is now about the extent of the damage: how many workers discouraged, how many organisations broken, how many investment opportunities missed.
The government’s focus on the deficit rather than the health of the economy is entirely self-defeating. The IFS reports that the Chancellor will likely be forced to abandon one of his fiscal targets: that debt be falling as a proportion of GDP by 2015-16. By the time of the next election, the latest forecasts project that the national debt will be above 80% of GDP and still rising. Osborne’s second fiscal rule – that the budget return to balance over the next five years – is a rolling target, which means he must prolong austerity if the economy fails to recover. The latest figures suggest that he will have to impose yet another year of austerity, the aim now to get the budget into balance by 2017-18. The Five-Year Austerity Plan has become an eight year plan.
We will see the usual excuse for economic failure – economic headwinds from the Eurozone. The Chancellor will not admit that those headwinds are partly the result of the same austerity strategy applied across Europe. He will now pin his hopes for a more favourable outcome on the new Governor of the Bank, Mark Carney. But the Bank will not be able to rescue him while remaining true to its anti-inflation target. Thus the only medicine he can offer is more of the same.