Osborne must now face up to his fiscal failings
POLITICS can be like a yo-yo: last week, George Osborne received the best press since he became chancellor, basking in the triumph of appointing Mark Carney as Governor of the Bank of England. This week will be very different, with his Autumn Statement on Wednesday guaranteed to be the political equivalent of trying to square a circle. At best, he will temporarily spin himself out of trouble; at worst, he will look disastrously exposed, with his fiscal plans crippled beyond repair.
The simple reality is that the economy is not going well for the chancellor. This will be the fourth year out of the last five that the economy has underperformed consensus expectations; even after last quarter’s 1 per cent spurt, this remains the worst recovery of the modern era. Output in the third quarter remains 3.1 per cent smaller than the pre-recession peak reached during the first three months of 2008, now 18 quarters ago. By contrast, GDP was 4-5 per cent above peak at this stage in the 1970s and 1980s cycles, and 7-8 per cent above at this stage in the 1990s, as star number-cruncher Michael Saunders of Citi reminds us.
Consumer spending remains 4.1 per cent below peak. The economy needs to rely less on consumption – but the problem is that investment (private and public, including housebuilding) is down an even sharper 19 per cent. Depressingly, one of the few growth areas (up 4.5 per cent) is government consumption. Forget about “rebalancing”: more state consumption, less private spending – it’s a disaster. Overall domestic demand remains 5.2 per cent below peak.
Many readers of this newspaper will find the grimness of the figures to be implausible – and it does look as if they may be exaggerated by faulty statistics that will eventually be improved. But even if the detail is wrong, it still seems that the overall picture is correct; it only “feels” better than the data in London and the commuter belt. For most of the UK, the reality “feels” as bad, if not worse, than the official statistics.
The next couple of years look equally depressing. The Office for Budget Responsibility will on Wednesday slash its growth forecasts; the only question is by how much. The Ernst and Young Item Club, which uses the same model to predict the economy as the Treasury does, expects a downgrade to -0.1 per cent for 2012 and 1.2 per cent for 2013, from the 0.8 per cent and 2 per cent respectively the OBR had predicted in March. But next year’s figures could eventually be cut back further if the Eurozone continues to sour – recent data have been exceptionally grim – the US fiscal cliff derails America or if any other major problem hits the global economy.
The main issue is that Osborne’s plans were predicated on buoyant economic growth. Now that this hasn’t materialised – partly because of an abject failure to introduce supply-side reforms and to liberate the economy’s productive potential, excessive levels of domestically-generated inflation, as well as misguided policies to keep alive low-productivity zombie firms – the deficit is increasing again. Not only will the chancellor have to admit to an overshoot in his borrowing for this and next year but he will have to accept that his supplementary target – to cut public sector net debt as a share of GDP from 2015-16 – has no hope of being met either. It’s going to be an interesting week.
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