Freezing weather has hit sectors, but whether growth is negative or 0.2%, the underlying picture is of an economy struggling
Will it or won’t it? Is the UK about to experience its first ever triple dip or will the next set of growth figures be the point at which the economy finally turns the corner? One thing is for sure. Every piece of data published in the few remaining weeks before the release of the flash estimate of GDP at the end of April will be pored over for triple-dip clues.
Two things are worth mentioning from the outset. The first is that the political impact of a weak number will be greater than its economic significance. It doesn’t matter that much whether growth was plus or minus 0.2% in the first three months of 2013; the underlying picture is of an economy struggling to get out of first gear.
The second is that the initial estimates of GDP from the Office for National Statistics are tentative, based as they are on incomplete evidence which can be substantially revised later.
It is worth noting, in this respect, that Britain’s double-dip recession in late 2011 and early 2012 now looks extremely shallow, with output declining by 0.1% in two of the three quarters of negative growth. It is possible the double dip will eventually be revised away completely.
Still, none of that will count for much if the ONS reports on 24 April that the economy did suffer a second consecutive quarter of falling GDP between January and March this year.
So what is the outlook? The data so far is both scanty and mixed. Output of both the industrial production and construction sectors was down in January. But there was better news for George Osborne from Thursday’s report from the service sector, with 0.3% growth between December 2012 and January 2013. That’s a relatively modest increase, but given that services account for 77% of GDP, the pickup helps to offset the bigger falls in industry and on building sites. What’s more, the performance of the service sector would almost certainly have been stronger had it not been for the poor weather in the second half of January.
Evidence from the high street suggests that there was a bounce back in spending in February once the thaw set in, and the Office for Budget Responsibility believes the economy will expand by 0.1% in the first quarter. Crucially, though, that forecast was made before it became clear that the UK would have its coldest March for 50 years, and before Cyprus provided the latest twist to the eurozone saga.
Despite some signs that the economy is strengthening slightly, a triple dip remains a very real possibility.
Abolition of air passenger duty would create around 60,000 jobs according to British Airways commissioned report
UK-based airlines have launched a renewed attack on air passenger duty with a report that claims the UK economy would be boosted by £16bn a year if the tax was scrapped.
Commissioned by four British airlines including British Airways, the report by PricewaterhouseCoopers claims that the abolition of the tax would create almost 60,000 extra jobs in the UK in the long term. It adds that scrapping APD would pay for itself by increasing revenues from other sources such as income tax and VAT.
The boost to GDP would come from three main sources, the study says: extra investment by airlines; more tourist visits to the UK; and a boost for domestic businesses from more business travel.
PwC said: “Abolishing APD has the potential to reduce the cost of flying, making it cheaper for businesses to maintain relationships with overseas customers. In this sense APD could be regarded as a tax on exports.”
It added: “APD is at least as damaging to the UK economy, and probably more so, than corporation tax or fuel duty.”
Introduced in 1994, APD has since January 2007 increased by up to 260% for short-haul flights and up to 360% for long-haul flights. APD costs £13 for a short-haul flight and up to £92 for a long-haul journey.
Office for Budget Responsibility expects a contraction in GDP of 0.1% this year and growth of 1.2% in 2013
George Osborne was forced to admit that the grim outlook for economic growth means he has broken one of his two self-imposed fiscal rules and the Tories will go to the polls in 2015 promising another three years of austerity.
Back in 2010, when the brand new Office for Budget Responsibility published its first assessment of the economic outlook, it was expecting Britain’s recovery to be in full bloom by now. Growth in 2012 was forecast to be a healthy 2.8% this year, rising to 2.9% in 2013.
But ever since that first outing, the OBR’s forecasts have repeatedly been pummelled by reality, and on Wednesday it announced that it now expects an outright contraction in GDP of 0.1% this year, and anaemic growth of just 1.2% in 2013.
According to its chairman, Robert Chote, the downgrade would have pushed the public finances £105bn off course over the next five years without the series of one-off factors that flattered Osborne’s figures.
The OBR’s latest forecasts fell more closely into line with the bleak City consensus. In his speech to the House, Osborne insisted Britain was “on the right track;” but said that there were “no quick fixes,” for an economy still working through the after-effects of the deepest recession in a century, and what he called the “decade of debt”.
According to the OBR, the weaker-than-expected performance of the economy reflected three factors:
• Consumer spending was lower in real terms after high inflation devalued shoppers’ spending power.
• Business investment failed to recover as expected as a result of bank loan rationing and is likely to stay depressed compared to the OBR’s original forecasts.
• Net trade is weaker than expected after British firms failed to capitalise on the lower pound to improve sales abroad. The OBR said the euro crisis, slower growth in China and the economically unstable situation in the US were to blame.
Osborne seized on the OBR’s assessment that the government’s austerity programme was not to blame for the deterioration in the economic outlook.
Chote’s view contradicts the International Monetary Fund, which warned governments to restrain spending cuts after it calculated that every pound cut from government spending reduced output by an average £1.30.
Judged by the two rules he set himself when the coalition came to power, the OBR scored Osborne one out of two. It said he looks set to meet his first rule, the “fiscal mandate” – to balance the budget over the coming five years, adjusted for the economic cycle.
But Chote said the government will take a year longer before it can reduce the UK’s debt as a proportion of GDP – busting Osborne’s second rule, that public debt as a share of GDP should be falling by 2015-16.
He said: “We now expect debt to rise in that year, to a peak of just under 80% of GDP, and then to start falling in 2016–17. So we believe that it is more likely than not that the government will miss the supplementary target.”
Shadow chancellor Ed Balls was thrown off balance by the fact that despite the double-dip recession, the deficit will actually be £11.5bn lower than previously forecast this year, adding £108.5bn to the public debt, instead of £120bn – a fact the chancellor gleefully pointed out.
The total was flattered by a series of one-off factors, including the expected £3.5bn revenue from the sale of the 4G phone network; the £11.5bn windfall from the Bank of England’s Asset Purchase Facility; and the Royal Mail’s pension fund being taken on to the government’s books.
Danny Gabay, of City consultancy Fathom, said: “We do feel uneasy about a system where internalising the Royal Mail pension deficit, selling some ‘air’ (otherwise known as 4G licences), and seizing the proceeds of APF gilt purchases can apparently lead to a material improvement in the public finances.”
Even with this extra helping hand, though, Osborne was only able to hit his first target by extending austerity for another year.
In 2010, he had expected to be able to stop swinging the axe before the end of the parliament, in 2015. He is now promising cutbacks until 2017-18, with much of the pain falling on benefit claimants, who will see their payments increase by 1% a year, instead of being uprated in line with inflation – a measure that will bring in £3.7bn a year, but squeeze the living standards of poor families.
Crucially, the OBR has also attributed most of the downturn in the economy since its last outing in March to a short-term, cyclical downturn, instead of a more permanent, structural crisis in the economy.
Since his “fiscal mandate” is adjusted for the economic cycle, if Britain is still stuck in a slump, Osborne can run a deep deficit without busting the rule.
Economists outside the OBR were puzzled at precisely how its latest forecasts had been arrived at. Jonathan Portes, director of the national institute for economic and social research, said: “They’ve just thrown out their previous approach and made up a number instead.” The OBR now expects the cyclically-adjusted deficit to be 0.9% in 2017-18; but in cash terms the Treasury will still be borrowing £31bn.
Some City analysts claimed the OBR’s growth forecasts still looked too upbeat: Chris Williamson, of Markit, said they contained, “some eye-catching numbers which still have an air of undue optimism about them”, highlighting its prediction that the modest recovery next year would be partly driven by a 5% rise in business investment.
Chancellor says the Office for Budget Responsibility now forecasts a contraction of 0.1% in 2012 but insists that the ‘British economy is healing’
George Osborne has insisted the British economy is “on track” – despite warning that he now plans to extend austerity measures until 2017-18, deep into the next parliament, as weaker-than-expected growth hits the public finances.
Delivering his autumn statement to the House of Commons on Wednesday, the chancellor insisted there were “no quick fixes” for the British economy.
He said the Office for Budget Responsibility was now predicting a contraction of 0.1% in 2012, down from the growth of 0.8% it forecast alongside the chancellor’s March budget.
“It’s taking time but the British economy is healing,” he told MPs. The independent forecasting body also slashed its forecast for GDP growth next year to 1.2%, down from 2%.
Despite the weaker-than-expected outlook, however, the chancellor reaffirmed his determination to press ahead with the coalition’s deficit-cutting strategy, insisting that, “turning back now would be a disaster”.
He said he was wrestling with the consequences of the “decade of debt” at home, as well as the eurozone crisis, and fears of a “fiscal cliff” in the US.
Flat-lining growth has depressed tax revenues, hitting the public finances hard. Osborne said the OBR has judged that he now looks likely to miss his promise that the national debt would be falling by 2015-16. Instead, the OBR believes debt as a share of GDP will now peak at 79.9% in 2015-16, instead of 76.3%, a year earlier, as it predicted in March.
However, the OBR’s assessment does show the government meeting Osborne’s other target, the so-called “fiscal mandate”, of balancing the budget over the next five years. The deficit is expected to fall as a share of GDP over the coming five years, from 6.1% this year, to 1.6% in 2017-18. It was previously expected to be just 1.1% by 2016-17.
“The deficit is still far too high for comfort; we cannot relax our efforts … the road is hard, but we cannot relax our efforts”, he told MPs.
“This government has shown that it is possible to restore sanity to the public finances, while improving the quality of the public services.”
The shadow chancellor, Ed Balls, has blamed the government’s spending cuts for pushing Britain into a double-dip recession by sucking demand out of the economy.
But Osborne said the OBR’s assessment, which will be published in full later on Wednesday, blamed the depth of the 2008-09 recesssion; the slowdown overseas; and the fragile state of the banking sector for the weaker-than-expected growth performance of the economy.
The chancellor set up the independent OBR to ensure that the Treasury could no longer present deliberately optimistic growth forecasts to make the public finances add up.
However, the OBR has repeatedly been forced to revise down its projections, as recession in the eurozone and slowing demand from emerging economies has hit growth. When Osborne delivered his first, “emergency” budget in June 2010, the OBR was expecting growth to be 2.8% this year, and 2.9% in 2013.
The crucial economic announcements made by chancellor George Osborne in his autumn statement to the Commons
Here are the crucial economic announcements made by chancellor George Osborne today in his autumn statement to the Commons.
Hit refresh to update the page as the statement continues.
• Office for Budget Responsibility adjusts growth forecast downwards to -0.1% this year (previous forecast for 2012 was 0.8%).
• OBR says trade, not austerity, to blame for lower growth, Osborne says.
• OBR forecasting 1.2% growth next year, 2% in 2014, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017.
• 2008-09 contraction was deeper than previously thought: GDP shrank then by 6.3%.
• Deficit has fallen by a quarter in last two years and will “continue to fall”.
• Deficit forecast to fall from 7.9% last year to 6.9% this year, then 6.1%,
5.2%, 4.2%, and 2.6%, reaching 1.6% in 2017-18.
• £33bn saving on interest payments predicted two years ago.
• OBR says government is “on course” to meet target of getting rid of structural deficit over five years.
• Period of austerity extended by one year to 2017-18.
• OBR says the government will miss its target of getting debt falling as a percentage of GDP by 2015. It will be falling by 2016-17, he says.
• Net debt forecast to be 74.7% this year, then 76.8% next year, then 79%, 79.9%, falling to 79.2% in 2016-17 and 77.3% in 2017-18.
• Borrowing set to fall from from £108bn this year to £99bn next year, £88bn in 2014, then £73bn, then £49bn, then £31bn in 2017.
• Since the election, 1.2m jobs created in the private sector.
• OBR predicting unemployment to peak at 8.3%.
• “It is a hard road, but we’re getting there,” says chancellor. “Turning back now would be a disaster.”
• Bonds trading at yield of 1.81% instead of 3.14% two years ago.
• Departmental budgets cut by 1% this year, and 2% next year. NHS and schools exempted.
• Local government budgets cut by 2% in 2014.
• Share of national income spent by the state to fall from 48% of GDP in 2009-10 to 39.5% in 2017-18.
• International development spending remains at 0.7% of GDP (although GDP now lower).
• Capital investment in infrastructure totalling £5bn over two years
includes £1bn for roads, upgrading A1, A30, and M25. High Speed 2 rail link will be extended to north-west England and West Yorkshire, and London’s Northern Line will be extended to Battersea.
• Investment of £600m in science, £270m for further education
colleges, and £1bn for schools.
• The 40% higher rate tax threshold will go up by 1% in 2014 and 2015 from
£41,450 now to £41,865 and then £42,285.
• Personal tax allowance to rise by £235 more than planned in April 2012. It will now go up £1,335 in total next year. That will take the personal allowance to £9,440. Extra rise will not be adjusted so will benefit higher rate taxpayers too.
• From April 2014 main rate of corporation tax will drop 1% to 21%.
• Three pence per litre fuel duty rise planned for January cancelled.
• Bank levy rate increased to 0.13% next year.
• Additional HMRC spending of £77m to fight tax avoidance by wealthy individuals and multinationals – expected to increase money collected from tax evasion and avoidance by £2bn a year.
• No new tax on property.
• The capital gains tax annual exempt amount will increase by 1% in 2014 and 2015, reaching £11,100.
• The inheritance tax nil-band rate will rise from £325,000 now to £329,000 in 2015-16.
• New measures to save £1bn over four years from fraud, error and debt in tax credit system.
• Basic state pension to rise by 2.5% next year to £110.15 a week.
• Treasury to raise £1bn by cutting tax relief on pensions. Lifetime allowance to drop from £1.5m to £1.25m. And the annual tax free limit will go from £50,000 to £40,000.
• Isa limit to go up to £11,520.
• Most working age benefits – including jobseekers’ allowance, employment and support allowance and income support – to be uprated by 1% for the next three years.
• Child benefit to rise by 1% for two years from April 2014.
• Welfare changes save £3.7bn by 2015-16.
Gloomy deficit and growth forecasts as health secretary Jeremy Hunt rebuked over spending claims
George Osborne is facing politically damaging charges that he is reducing NHS spending in England, and failing to cut the deficit this year, the opposite of the Conservatives’ central pledge of the 2010 election campaign.
Ahead of Wednesday’s autumn statement, in what is likely to be a day of bad news on growth, borrowing, debt, taxes and broken fiscal rules – and with the chancellor acknowledging there are “no miracle cures” to the country’s economic strife – the government faced the additional embarrassment of its official statistics watchdog telling the health secretary, Jeremy Hunt, he was wrong to claim that NHS spending was rising.
Ministers have repeatedly said the health budget was rising in real terms.
But the chair of the UK statistics authority Andrew Dilnot, following a complaint by the shadow health secretary, Andy Burnham, said he “concludes that expenditure on the NHS in real terms was lower in 2011-12 than it was in 2009-10″.
He has asked Hunt to “clarify” statements on the Conservative website claiming “we have increased the NHS budget in real terms in each of the last two years”. Hunt himself told MPs on 23 October that “real-terms spending on the NHS has increased across the country”.
The scale of the reduction in NHS spending is very small, but taken alongside the expected Office for Budget Responsibility report showing borrowing rising, it does mean Cameron is not meeting his promise at the start of 2010 to cut the deficit, and not the NHS.
The chancellor was expected to say on Wednesday: “In this autumn statement, we show that this coalition government is confronting the country’s problems, instead of ducking them. The public know that there are no miracle cures. Just the hard work of dealing with our deficit and ensuring Britain wins the global race.”
A Department of Health spokesman challenged Dilnot’s conclusion, saying: “The 2010-11 year should not be used as a baseline for NHS spending because the budget and spending plans were set in place by the previous government. For the first year of this government’s spending review, as Andrew Dilnot acknowledges, NHS spending increased in real terms compared to the previous year by 0.1%.”
The OBR will on Wednesday reduce its 2012 forecast made in March from 0.8% growth to about zero and for 2013 from 2% to about 1%. The target to reduce public debt as a share of national income by 2015-16 will also be missed. Osborne may also be forced to concede the structural deficit will not be eradicated for another five years, pushing the austerity to near the end of the decade.
In an attempt to give the economy a short-term boost ahead of the 2015 election, Osborne announced on Tuesday he was releasing £5bn for capital projects, mainly funded by cutting Whitehall departmental spending by 1% in 2013-14 and 2% the following year.
Health, schools and overseas aid will be exempted from the cuts, as will local government in the first of the two years. The Ministry of Defence will be allowed to roll over an underspend this year to next year.
The capital spending will include £1bn for schools to find 50,000 extra school places, including new free schools, academies and places in existing well run schools. London councils say the money is insufficient to meet the shortfall in places in London alone.
The rest of the capital spending will go on transport, skills, including further education and science. Extra help will be provided to infrastructure projects.
The Treasury says the extra capital spending will mean that capital spending on average will be higher in this parliament than in the previous three parliaments from 1997 to 2010.
A similar £5bn switch was announced in last year’s autumn statement. But research by the Guardian shows that more than half of the new capital investment announced in that autumn statement has not yet been spent on buying goods and services or paying wages, while projects have taken months to be ready and to process the money, awaiting planning permission or other hold-ups.
Most economists believe the continuing deterioration in the public finances will force Osborne to abandon his hopes of meeting his self-imposed rule to get public debt falling as a share of national income by 2015-16.
The Treasury believes the markets are already braced for the announcement, and there will be no damage to Britain’s credit rating.
Osborne will aim his statement at Britain’s “strivers” with a freeze in fuel duty aimed at household budgets while welfare benefits will be squeezed, but not frozen. The chancellor has already said the rich will be asked to pay more, including an expected cut in tax relief on pension contributions for high earners.
The extra £5bn over the next two years on capital spending will have “a minor, almost negligible” impact on overall economic growth, the Ernst and Young Item Club said.
The club, which said earlier this week that an extra £14bn on capital spending over the same period would raise economic growth by 0.5% of GDP a year, said it would be difficult to estimate the impact of £5bn over the same period.
Nida Ali, economic adviser to the Item Club, said: “Although it is a step in the right direction it is likely to have a minor, almost negligible, impact on the growth rate. It is not likely to be very visible.”
Ali added that the impact of extra capital spending is “likely to be even more negligible” because the changes will be fiscally neutral after the chancellor announced that the money would come from underspends in current budgets.
“We think the £5bn on capital spending is a step in the right direction. But we feel this is still not enough to have a big impact on growth because he has tightened elsewhere to be able to find this £5bn.” Gemma Tetlow, of the Institute for Fiscal Studies, said the £5bn would stimulate economic growth, though this would be within the margin of error of GDP forecasts. Tetlow said the extra capital spending would stimulate growth by less than 0.2% of GDP a year using the OBR’s estimate that it provides a fiscal mutiplier of one. GDP stands at £1.5tn.
Osborne also faced the embarrassing news that his flagship plan for workers to be given company shares in return for abandoning their employment rights, to be confirmed on Wednesday, has already been rebuffed by business leaders. The business department confirmed that fewer than five organisations out of 209 respondents “had welcomed the scheme and said they would take it up”. Osborne had put the proposal at the heart of his speech to the Tory conference in October.
Deficit hawks rely on media allies to report budget doom to advance their agenda of cutting Medicare and social security
Many of the nation’s most important news outlets openly embrace the agenda of the rich and powerful that colors its coverage of major economic issues. This is perhaps nowhere better demonstrated than during the current budget standoff between President Obama and Congress, which the media routinely describes as the “fiscal cliff”. This terminology seriously misrepresents the nature of the budget dispute, as everyone in the debate has acknowledged. There is no “cliff” currently facing the budget or the economy.
If no deal is reached this year, then on 1 January, daily tax withholdings will rise by an average of about $4 per person. Any money actually deducted from pay checks will be refunded if a deal is subsequently reached that returns tax rates to 2012 levels. Government spending probably won’t change at the start of the new year, since President Obama has considerable discretion over the flow of spending. No one can think that this modest increase in tax withholdings would plunge the economy into a recession, but the Wall Street types seeking to dismantle social security and Medicare have used their enormous wealth and allies in the media to generate this kind of fear-mongering across the country.
One way in which they have pushed their agenda has been in misrepresenting projections from the Congressional Budget Office (CBO). The CBO’s projections show that if higher tax rates and lower spending are left in place for the whole year, then it will substantially slow growth and push the economy into a recession. However, these projections explicitly assume that we go a whole year without reaching a deal. They say nothing about what happens if the government cuts a deal by the second or third week in January. Even a Washington Post editor should be sharp enough to understand this distinction; nonetheless, many stories have implied that the recession projections apply to missing the 1 January deadline.
Wall Street types have also pushed this idea that the markets are demanding for programs like social security and Medicare be cut. This sort of assertion, which is treated as a fundamental truth by the Washington insider crowd, has the wonderful feature of escaping contradiction. Of course, none of us knows exactly what will trouble the financial markets or by how much that trouble would hurt the economy. (In fact, even a sustained drop in the stock market has a limited effect on the economy, and short term fluctuations have almost no impact.) This means that when Wall Street, or their designated mouthpieces, make authoritative-sounding claims that the markets will be upset if we don’t cut social security or Medicare as part of a budget deal, there is no direct way to refute them. After all, it is possible that they might be right.
If economic reporters did their job, though, they would be looking for evidence to support these assertions about financial markets. They could start by looking at the track records of those issuing the warnings. If they examined the track records of people at organizations like the Campaign to Fix the Debt, and other deficit hawks, they would reveal to their audiences that these “experts” have the distinction of being almost 100% wrong on just about all their economic predictions over the last five years.
This crew has been predicting that large budget deficits would cause interest rates to skyrocket ever since President Obama’s first round of stimulus, almost four years ago. Many also predicted that inflation would explode. Yet, none of them warned us about the housing bubble: they were too busy running around the country yelling about the budget deficits even when the deficits were small enough that the debt to GDP ratio was actually declining.
In short, major national news outlets have adopted the agenda of the Wall Street elite that displays zero evidence of any understanding of what drives the economy, wholesale. Their assertions that the markets will panic without a budget deal that cuts social security and Medicare have no apparent foundation in reality. It is just a threat that they have concocted to advance their agenda. Now, that would make for a very good news story.
The economy is still flatlining, GDP is below where it was in 2008 and the chancellor has had to water down his austerity plans
Booed at the Olympics. Author of the worst received budget in memory. In charge when the economy plunged into its first double-dip recession since the 1970s. It has been a year to forget for George Osborne. And it is about to get worse.
The biggest week of the chancellor’s two and a half year stint at the Treasury began on Sunday with a dogged “no turning back” performance on The Andrew Marr Show. It will culminate on Wednesday when he delivers his autumn statement.
Although it will be dressed up as prettily as possible with the promise of a £10bn crackdown on tax avoidance, the underlying message will be that Osborne has failed to deliver the new economy – less dependent on the City and living within its means – promised on his debut as chancellor in the Treasury’s inner courtyard one sunny morning in May 2010.
Instead, as the nights grow longer in December 2012, he will have to admit that deficit reduction is off-track, that he cannot meet his self-set rules for managing the nation’s finances and that austerity will continue well into the next parliament.
“It is clearly taking longer to deal with Britain’s debts, it’s clearly taking longer to recover from the financial crisis than one would have hoped but we have made real progress,” Osborne said.
But the clock is ticking. Wednesday marks the halfway point between May 2010 and the next general election in the spring of 2015, and the expected pick-up in the economy has not happened.
Michael Saunders, UK economist at Citibank, said even after the 1% growth in the third quarter of 2012, Britain had experienced the “worst recession-recovery cycle for many decades”.
GDP is 3.1% below where it was when the recession began 18 quarters ago in early 2008. “By contrast, real GDP was 4-5% above the pre-recession peak at this stage in the 70s and 80s cycles, and 7-8% above the peak in the 1990s”, Saunders said.
In his first budget, in June 2010, Osborne said forecasts produced by the Office for Budget Responsibility showed that the economy would be expanding by 2.8% in 2012, with the budget deficit down to £60bn in the 2013-14 financial year. In the 2011 budget, the OBR said growth would be lower at 2.5% and the deficit higher at £70bn. In the March 2012 budget, it estimated growth of 0.8% and a deficit of £98bn.
On Wednesday Osborne will admit that even these forecasts have proved too optimistic.
Hopes have been dashed of a repeat of the 1980s. Then, Geoffrey Howe raised taxes and squeezed spending but saw growth accelerate in time for the Tories to win the 1983 election. Osborne has increased VAT, frozen public sector pay, made welfare less generous and announced real cuts for all Whitehall departments except health and international development. And seen the economy flatline for the past two years.
The chancellor’s critics point to key differences from the 1980s: energy prices fell sharply, there was scope to cut interest rates and the rest of the world economy began a long upswing.
The TUC’s general secretary designate, Frances O’Grady, said: “Two and a half years in and the chancellor’s masterplan to blast a significant hole in the deficit during this parliament looks decidedly like a project on the verge of failure. Despite embarking on the sharpest spending cuts in modern history, government borrowing continues to rise.”
Free-market thinktanks offer a different perspective. For them, Osborne’s problem is that he has pussy-footed around with the deficit, and deeper spending cuts would generate growth by allowing taxes to be cut.
But with the economy at risk of a triple dip recession, the chancellor believes it would be unwise to intensify the austerity programme. Instead, he is expected to push back the date at which Britain’s national debt as a share of GDP will start declining. Politically that’s a real problem, because a slower, less aggressive approach was what the previous chancellor, Alistair Darling, proposed back in 2010.
Darling accused the chancellor of a “bankruptcy of ideas” and Ed Balls, the shadow chancellor, is waiting to pounce on Osborne’s admission that weak growth means borrowing this year is going up, not down.
The chancellor’s defence will be that Britain has chronic economic problems, that Labour left him a dreadful inheritance and that he has been the victim of events beyond his control: the crisis in the eurozone and rising commodity prices in particular. He will insist that despite its track record the government is on the right course.
Doug McWilliams, the chief executive of the Centre for Economic and Business Research, said any chancellor would be forced to tackle the deficit and Osborne had been ill-served by the OBR’s duff forecasts.
Nick Parsons, head of strategy at National Australia Bank, said one success had been in protecting Britain’s AAA credit rating, now under threat. “The credit rating is much less important going forward but when it was important it was very important,” Parsons said, adding that in May 2010, Britain and Spain both had to pay just over 4% to borrow money for 10 years on the money markets. “One government had a deficit reduction plan, the other did not, which was why bond yields went to 7.5% in Spain and to 1.5% in the UK.”
Yet, Parsons added, the government has failed to exploit the benefits of low interest rates, to the irritation of its Liberal Democrat coalition partners, who would have liked Osborne to borrow cheaply to fund infrastructure projects.
Although not in the euro, Britain’s recovery has been slower than that of Germany or France. Only Italy of the G7 industrial nations has a weaker growth record and in the business community, which backed Osborne’s deficit reduction plan, patience is wearing thin.
Sir Martin Sorrell, chief executive of the advertising company WPP, acknowledged that the deficit reduction strategy had kept financial markets sweet and ensured interest rates remained low.
“That’s all fine. The trouble I have had is the overall plan. You can ask people to make sacrifices and talk about grim times but it becomes a self-fulfilling prophecy if you don’t have a plan.” Sorrell said it was a political mistake to cut the top rate of tax for the rich when living standards for the less well-off were being squeezed. He said action was needed on technology, hard and soft infrastructure, tax, immigration, and housing. “These are all the things that make a comprehensive plan. The coalition does bits but it doesn’t look like a joined up plan.”
Terry Scouler, chief executive of the EEF, which represents manufacturers, agreed. In the 2011 budget Osborne hailed the “march of the makers”, but Scouler said: “If this were a classroom and we were marking the government, even allowing for issues beyond their control such as the eurozone, our message would be ‘could do better’.” Scouler rejected the argument that Osborne’s problems were not of his own making. “The government didn’t respond quickly enough to the re-emergence of the eurozone crisis in 2011.”
One manufacturing firm bucking the trend is David Nieper, a clothing firm based in Alfreton, Derbyshire. The company, which celebrated its 50th anniversary in 2011, has thrived while most of Britain’s textiles industry has disappeared by direct selling of quality products at home and abroad.
Managing director Christopher Nieper said the firm had continued to grow throughout the recession, and was producing 25% more than it was this time last year. “We had our highest sales last year in our 50-year history.”
Nieper says the firm has succeeded by developing a niche market: upmarket clothes made to order for customers with plenty of disposable income, mostly in the 40-plus age range. The company exports 36% of its production, turnover has gone up from £600,000 to £14m in the past 10 years, and 30 new members of staff were hired in the past year.
Yet Nieper said manufacturers needed more help from the government, adding that the cuts in capital allowances to finance lower corporation tax rates were a mistake. He urged cuts in national insurance contributions – “a tax on jobs” – to encourage hiring and do more to develop skills.
Green groups worry that the pressure to get the economy moving is leading to Osborne playing fast and loose with the environment. Dave Powell, economics campaigner for Friends of the Earth, said that in opposition, Osborne had been critical of Labour’s record on climate change, but it had been a different story since May 2010.
The chancellor, Powell said, had opposed long-term targets for de-carbonisation, promoted a dash for gas, provided tax breaks for North Sea exploration while hacking away at subsidies for renewable energy, cut spending on home insulation, hamstrung the new Green Investment Bank and backed the construction of new roads and airports.
“We have a sense of despair. There is such a pressing need to decarbonise the economy but we are still fighting the old short-termist battles. You still get the impression that for Osborne looking after the environment is a luxury.”
The chancellor and his team know that the next 12 months are crucial. Osborne believes that if he can get the economy moving in 2013 there is still time to win an election on the basis that Labour’s mess is being cleared up.
Current portents are not good. The Organisation for Economic Cooperation and Development predicted last week that the UK would grow by just 0.9% and Sorrell said the mood of business was downbeat. “Planning our business in 2013 we are taking a very cautious approach. It’s going to be quite tough.”
Lord Oakeshott, a former Liberal Democrat Treasury spokesman, said a big problem was the unwillingness of the banks to lend. RBS and Lloyds – the two banks in which the taxpayer has a large stake – between them account for 60% of the small business market. “There has been a monumental failure to face up to that.”
The other problem, Oakeshott added, was the Treasury itself. “It is like a beached whale watching as the economic tide goes in and out”, he said. “There is much talk of Plan B. The Treasury only has a Plan I: I for Inertia.”
Gross domestic product is the economic output of Britain. See how it has changed over time
• Get the data
Britain’s households increased their spending at the fastest in more than two years during the three-month period that included the Olympic Games, helping the economy to expand by 1%.
Britain has emerged from double-dip recession. The second estimate for the third quarter has confirmed growth at 1%, up from the -0.4% in the second quarter of 2012.
The boost provided by the London Olympic Games helped household spending to rise by 0.6% in the July to September period, its fastest growth since the second quarter of 2010. A 3.7% increase in investment spending and a better trade performance also boosted gross domestic product.
The ONS explains the data as follows:
• Output of the production industries rose by 0.9%, revised down from the previously estimated increase of 1.1%
• Manufacturing output rose by 0.9% in the third quarter of 2012, revised down from the previously estimated increase of 1.0%
• Output of the service industries rose by 1.3%, unrevised
• Output of the construction industry fell by 2.6%, revised down from the previously estimated 2.5% fall.
• Household final consumption expenditure increased by 0.6% in volume terms in the latest quarter
A technical recession is defined as two or more consecutive quarters of economic decline. That means the UK has emerged from double dip recession.
The data we have gathered shows percentage change in GDP going back to 1948, we have a spreadsheet to download that shows GDP in cash, ie what it was that year not adjusted for inflation, total inflation-adjusted figures and per capita inflation adjusted figures.
The figures show how recessions compare – thanks to the National Institute of Economic and Social Research for the data.
As several of our posters below have pointed out, there’s more to life than GDP – but here are the latest GDP figures from the ONS for you to explore.
Download the full data
World government data
Development and aid data
Can you do something with this data?
IFS says Scotland would be richer than rest of UK if it kept oil proceeds, but warns of crisis if revenue starts to run out
An independent Scotland would be richer per head than the rest of the UK if it kept the proceeds from North Sea oil and gas, but would face a crisis when that revenue started to run out, according to the Institute for Fiscal Studies .
The IFS said public spending per head was £1,200 higher in Scotland than in the rest of the UK, but oil and gas revenues would be more than enough to pay for this, provided that they were allocated to Scotland on a geographical basis, rather than shared out equally within the UK. As a result, taking into account North Sea oil, “GDP per head is somewhat higher in Scotland than in the UK as a whole”, the IFS said. “If UK debt were shared on a per capita basis, an independent Scotland might inherit a slightly smaller debt-to-GDP ratio than that faced by the UK.”
However, the IFS said oil and gas revenues were “very volatile” and this could pose problems for an independent Scotland.
In the mid-1980s, if oil and gas revenues had been allocated on a geographical basis, they would have accounted for nearly half of Scottish revenue. By 1991-92 they would have accounted for just 3% of Scottish revenue; in 2008-09, they were back up to 20%.
There would be a further problem when the oil and gas started to run out, the IFS said.
“Like the UK as a whole, and most other developed nations, an independent Scotland would face some tough long-term choices in the face of spending pressures created by demographic change,” it said.
“If, as is likely, oil and gas revenues fall over the long run, then the fiscal challenge facing Scotland will be greater than that facing the UK.”