George Osborne’s recovery plan is all about breaking free of the monetary straitjacket, not where his axe will fall
The billing for the autumn statement is all about cuts to come after the 2015 election. British economists debate when the chancellor will manage to move from a position where public debt is always rising as a proportion of our national output to one where at last it starts to fall. George Osborne had promised to get there by 2015, but we are now told that this magic moment is likely to be delayed beyond the next election. People seem to think this is the story.
In fact, none of this shadow boxing matters very much. For a start, Osborne’s deficit reduction strategy has always been wrongly described. Far from cutting current public spending, or even total public spending, he put it up in the first couple of years. There were individual areas of cuts, but overall the UK economy has recorded growth in its public sector. Austerity fell on the private sector through tax rises and inflationary price increases, especially of energy. The chancellor promised easy money to fuel a recovery, but the Bank of England has struggled to deliver this.
Those people who are mesmerised by the cuts to come misread the last two-and-a-half years, and fail to acknowledge the very real difficulty of knowing where we will be in 2015. I am suspicious of economic forecasts even when the forecasters are having a good run. As it is, the Office for Budget Responsibility and many private forecasters that take their cue from it have had a torrid time since the last election. The cutting room floor is littered with their revised economic forecasts as they have adjusted their sights downwards. One day they will get it wrong the other way, no doubt.
Not only is it difficult to estimate accurately how much output, income and tax revenue there might be in 2015, but we also have to guess who is going to be in government then. It is highly unlikely that the coalition government will be in power. It will not fight the next election as a government, and no one will be recommending to the voters its continuation. The battle in 2015 will be between Labour and the Conservatives.
The row about spending cuts or tax rises after 2015 is best left to nearer the next election, and will ultimately be settled by the electors. We should instead concentrate on the autumn statement’s positive actions for the next 18 months, and the forecasts for that same period.
We should expect action to promote cheaper energy. Rising energy and fuel prices have deterred industrial jobs, reduced consumer spending power and driven up inflation. This in turn has led to higher spending on benefits. Cutting fuel and energy bills would also relieve the pressures on family budgets. So expect Osborne to be more concerned about fuel poverty and the lack of manufacturing stimulus than CO2 emissions.
A progress report on more infrastructure investment is also likely. Labour cut public capital spending plans heavily just before it left office. The coalition retained most of these cuts, but faces the underemployment of the construction industry as a result. We should anticipate more progress on using the large infrastructure funding pots to get more projects under way. A new private finance initiative with a greater public sector role is part of this process. Expect more schools and power stations.
Finally, listen carefully to what the chancellor says about the banks, money and credit. The recovery plan always relied on a big dose of extra money through a loose monetary policy. So far this has been thwarted by damaged banks and tight banking regulators. Have the authorities now done enough with funding for lending and infrastructure funding to break free of the monetary straitjacket? That is what will determine the success or failure of this strategy, not the extent of cuts in 2015-16. A strategy of controlling public spending and boosting money could work. The figures so far show this has not yet been tried.