Speech on the Autumn Statement, in the House of Lords, 4th December 2014
Robert Skidelsky
House of Lords | Thursday, December 04, 2014

I concentrate on one point: the Chancellor’s failure to meet his budgetary targets.
 
Growth has been revised up to 3% this year, to be followed by 2.4% 2015, 2.2% in 2016, 2.4% 2017, 2.3%, 2.3%, 2.3% 2019, and so on.
 
These estimates are not worth the paper they are written on, being conditional on all sorts of things unlikely to happen.
 
Their importance lies in the fact that they are the basis of the budget projections.
 
In 2010 Osborne forecast growth of 2.3% in 2010-2011, 2.8% 2011-12, 2.9% 2012-13. In fact it was 1.6% 2010-11, 2011-12, 0.7%, 2012-13 1.7%.
 
According to the Chancellor economy should have grown by 8.2 compounded; in fact it grew by 4.1%.
 
No wonder his deficit reduction plans went awry.
 
Agreed, that it was not all his fault.
 
What happens to the budget is determined by what happens to the economy, and what happens to the economy is not all within the Treasury’s control.
 
But it’s equally important to remember, that what happens to the economy is largely determined by what happens to the budget.
 
This could hardly not be so, as government spends about 40% of GDP.
 
Ever since I started writing and speaking about these matters in 2010, I have been predicting that the Chancellor would not meet his budget targets.
 
The reason I gave was that the pursuit of those targets in itself slows down the economic growth on which their achievement depends.
 
Why? Because it slows down the rate of spending in the economy, and growth depends on spending. The cuts have hit the spending, and the spending has hit growth.
 
So it’s not surprising that the Chancellor finds himself with a projected deficit of £91.3bn this year, when in 2010 he promised to ‘balance the budget’ by the end of this parliament.
 
According to the OBR, the discrepancy between the projection and outcome results from ‘unexpectedly weak performance of tax receipts’.
 
Perhaps it was only unexpected to the experts at the Treasury.
 
In fact, it was the logical consequence of growth being so much below what was expected between 2010 and 2013, and of what has been happening to the labour market since.
 
The government have congratulated themselves on the fall in unemployment. We would expect falling unemployment to increase tax revenues and reduce public spending.
 
But not if unemployment is replaced by jobs which pay so little as to be exempt from tax, and which have to be propped up by benefits. For example, the number of housing benefit claimants who are in work has doubled since 2009.
 
Government policy has replaced unemployment by underemployment, no doubt better than complete idleness for those in work, but very little improvement for the exchequer.
 
[Incidentally, I don’t think the small rise in the personal tax allowance is a major explanation of the shortfall in revenue. It’s true that a tax cut at any given level of spending, will reduce the Treasury’s revenue. But a tax cut also stimulates spending, and therefore revenue. I don’t know what the balance between these two numbers is, but it can’t be large enough to explain anything much.]
 
So why has the British economy been growing at all? The answer is very largely because there are more people. The population was 62.3 million in 2010, today there are 64.1m, 2 million more, virtually all of them of working age. And more people are coming.
 
Any economy will grow if has more people to do the work. The only relevant welfare measure –the measure by which the government should be judged –is GDP per head. GDP grew by 4.1%, between 2010 and 2013, but GDP per head has grown by only 2.3%, and the typical earner is £1600 a year worse off.
 
So we are left with the prospect of another round of brutal spending cuts with the rolling five year programme rolling ever further into the future.
 
It sometimes helps if people running economic policy know some Keynesian economics.