Plan B for the UK?

George Osborne

A lot of bad economic news has brought Britain's major political parties closer together on one point: everyone now agrees the economy is not doing well and the government needs to do more to help.

That is no small thing. Even a few months ago it was possible for ministers to say the recovery was broadly on track.

In response to any bad news, the chancellor would remind us that he had always said it would be choppy. He would add that there were some very good things happening that tend to go under-reported: did we know that there were now hundreds of thousands more people in work than a year ago?

As I reported on Wednesday, he can't say that any more. For the first time since January 2010, the number of people in work is lower than 12 months ago; 47,000 lower.

Good news on trade

There are still some good things happening: yesterday brought news of a fall in Britain's trade deficit in August. The previous deficit estimates for 2011 have also been revised down, largely because the value of our exports of services has been revised up by an impressive £9bn.

This is indeed good news, though City analysts are divided on whether the improvement can last.

The most surprising and potentially worrying thing about these trade figures is that they show our exports to non-European countries going down compared with the first half of 2011, and exports to the rest of Europe have been going up.

Here's the really funny thing: the trade deficit with members of the eurozone actually shrank in August, from £2.4bn to £1.9bn. As economists from Capital Economics point out, in value terms, our goods exports to the eurozone that month were the highest since June 2006.

I'm sure that ministers are right to suggest that the Eurozone crisis is weighing on business confidence and hurting our growth prospects. But you can't find much evidence of it yet in the trade figures.

What is to be done?

We can find plentiful evidence that the economy is seriously lacking in momentum. The Prime Minister says the government must do more to help. But what, exactly?

The New Statesman gathered an interesting collection of proposals this week from, among others, a Nobel Prize winning economist and a former member of the MPC.

They make for an interesting read, but if George Osborne looked at the list, you can be pretty sure he would cross out anything that would significantly alter his chances of meeting his two key fiscal rules.

He believes the loss of credibility that would come from a real Plan B means it would do more harm than good. (Incidentally, some say the recent experience of the new Danish government has provided a counter-example to this view, but that's a story for another day.)

Let's assume the chancellor is not going to change his mind any time soon. In case you've forgotten, the first rule, or "fiscal mandate", is to balance the current cyclically adjusted deficit "by the end of a rolling, 5-year period". To translate, that measure of the deficit is the gap between public spending and revenues that is not expected to go away by itself with faster growth, and is not due to spending on public investment.

Mr Osborne's second, supplementary target is that Britain's net public debt as a share of GDP must be going down in 2015-16.

Because "cyclical" borrowing is excluded, the chancellor, in theory, doesn't have to worry about borrowing being revised up, simply as a result of slower growth. As long as the Office for Budget Responsibility thinks it's temporary, he won't have to raise VAT or find further spending cuts to make up the gap. Phew.

Wiggle room

As the IMF has pointed out, that provides quite a lot of room for the government to spend more if the economy slows. Our "automatic stabilisers", the rise in spending and fall in revenues that come from falling demand, are much larger than in the US, and seem to have been more powerful in the last few years than they have been in the past.

Note, also, that investment is excluded from the target. So, in theory, he could double his plans for public investment, as some have demanded, without straying from Plan A. (Though whether the press or the opposition would see it that way is another matter.)

Except, dammit, there's that second rule to consider, which says the debt ratio has to be falling, at least in 2015-16 (apparently, it can go up again in 2016-17). Extra borrowing due to slow growth, and extra borrowing for public investment, would all be included in that debt total and even on the current plans there's a decent chance that target will be missed and that debt will rise in that year.

That seems to rule out rather a lot, except that the debt target is net debt not total public debt. What's the difference, you might ask? The key difference is that net debt excludes borrowing to acquire "liquid financial assets" such as business loans.

That is why Mr Osborne can talk so generously about "credit easing". As I pointed out during a revealing interview with the chancellor last Friday, if the government borrows more money to lend to businesses, which is what credit easing seems to boil down to, that would sound like industrial policy to, say, Jim Callaghan or Edward Heath.

Chancellor George Osborne outlines the government's hopes for a second round of QE

But the chancellor can call it monetary activism because it doesn't increase structural current borrowing or net debt. How can it be fiscal policy when it doesn't count against either of his fiscal rules?

We can look forward to more details of credit easing in the Autumn Statement at the end of November. We can also expect to see more growth plans, which cannot, must not, be confused with a Plan B.

If I were a betting person, I would put money on a scheme to boost construction and/or infrastructure spending, which, miraculously, does not raise net debt.

You might say this all sounds rather reminiscent of Gordon Brown: finding loopholes in fiscal rules, all in order to borrow more. But Mr Osborne might be right: anything that really is a Plan B might have economic costs as well as political ones.

If he is right, anyone who believes the government should choose to borrow more, in these worsening circumstances, should be glad that he has room to do it in ways that might even do the economy some long-term good.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 24.

    Big questions:

    How economically literate and aware is GO?

    Same Q re Treasury officials? (Or are they like Home & Defence - and some other ministries perhaps?)

    Are the cuts actually producing reductions or is the spend, in reality, increasing?

    Has GO studied how reactive/responsive Chancellories/Treasury/Central Banks have to be in a globalised economy?

  • rate this

    Comment number 23.

    "....our exports to non-European countries going down compared with the first half of 2011, and exports to the rest of Europe have been going up."

    or to put it another way.

    Our Exports to countries that can afford to pay are declining and are Exports to countries likely to default is increasing.

    It doesn't instill much confidence does it?

    Expect more G20 spin..all words and no action.

  • rate this

    Comment number 22.

    It's also difficult for local authorities to take on more debt for house building because of the self finance model. Part of the agreement for self finance is that some local authorities take on part of the debt of authorities that have too much to be self financing. New debt would therefore need to be either outside self-financing (unlikely) or after the start of self financing (causing delay).

  • rate this

    Comment number 21.

    If we can 'start again' with welfare we can do the same thing with housing.
    Build social housing, rent it out at an affordable rent for 15 - 20 years until the economy has readjusted itself then sell it off at a reduced rate to kick start a new generation of home owners, and plough the revenue into more homes.

    We need affordable homes and the economic activity that goes along with building them.

  • rate this

    Comment number 20.

    WHAT RECOVERY !! there is no recovery we havent even reached bottom yet and weekly we are sinking deeper ...

    The root problem is not being addressed we blame it on everything the euro the dollar the chinese perhaps we should blame it on the boogie....

    GO neednt worry about confidence more people than ever are totally confidant we are on the wrong road and going the wrong way.

  • rate this

    Comment number 19.

    " sleight of hand is what got us into this mess...It may alter the headlines - but won't fool anyone."

    The problem is that the majority of this country, and I suspect Europe, believe the headlines and are fooled. Not enough of Joe Public realise the size and depth of the abyss we're curerently staring/falling into and how it will affect them in the long run.

  • rate this

    Comment number 18.

    15 HtH

    Social housing is an example of what is needed. Time to stop feeding the banks who are going to contract lending not expand it. Changing rules is not difficult. If you can go to war in weeks or months you can build housing & the like. There is more to the UK than banks. Banks cannot exist on their own. There have been comments that this is effectively an economic war. Time to do things.

  • rate this

    Comment number 17.

    I don't care what he calls it: Plan B, monetary activism, cheesy marshmallows.

    Can we dispense with all the political posturing please? We all know the main parties agree on economic policy. Just get on with it! (I don't approve of government policy, but I strongly object to abdication of responsibility.)

  • rate this

    Comment number 16.

    Doing something is way way overdue. The Eurozone rot has been evident for some considerable time. The problems in the US have been obvious for some considerable time. UK consumers sitting on their hands has been obvious for some considerable time. Even the BoE have eventually woken up to the lack of progress. When it is obvious why not do something.

  • rate this

    Comment number 15.

    Expanding house building via credit easing would be difficult. Private sector housing is driven by the market and most social housing organisations are legally not allowed to borrow in order to build. Some major rule changes would be needed.

  • rate this

    Comment number 14.


    More QE is at best IRRELEVANT!

    Investors/business people & savers MUST feel secure in that making money will be worthwhile. Not as it is at the present time worthless. (courtesy of the incredibly idiotic Ban of England). As without this the mechanisms of Capitalism will NOT create jobs.

    BBC TAKE NOTE - 400 characters is way too small to talk properly about this!

  • rate this

    Comment number 13.

    Our politicians are in much the same position as King Canute was
    with the tide. The politicians may be able to predict the economy
    a short way ahead, but they don't seem able to control it.

  • rate this

    Comment number 12.

    I fear 'Plane B from Outer Space'!

    The problems MUST be fixed.

    All Plan B can do is provide a safety net if the problem of the scale of private debt is ignored.

    ● Money must be priced properly.
    ● Unaffordable/Overpriced Assets (and rents) must be reduced along with the debt that needs to repaid or the assets repossessed.
    ● We must have a set of working banks or all best are off. NEW BANKS

  • rate this

    Comment number 11.

    Yes, strange how Osborne claims that our economy has worsened due to what has been appening in Europe, yet it did not show up in the trade figures!

    Clearly the reason unemployment went up is a lack of domestic demand, not global factors.

  • rate this

    Comment number 10.

    "[Osborne] believes the loss of credibility that would come from a real Plan B means it would do more harm than good."

    Making a mistake when faced with a difficult decision should be forgivable, continuing to make that same mistake over and over again despite all evidence that it isn't working has got to be attributed to either unbelievable arrogance or insanity...

  • rate this

    Comment number 9.

    Restarting economic growth requires that people feel their future is safe, i.e. reducing unemployment. 95% of UK employees work for small and mid-sized companies so those are the ones needing a financial boost
    That cannot happen via high-finance schemes like bonds - too costly and complicated. The solution is more and better bank loans which, since banks are not cooperating, requires a state bank

  • rate this

    Comment number 8.

    "If I were a betting person, I would put money on a scheme to boost construction and/or infrastructure spending, which, miraculously, does not raise net debt. "

    If I understand Steph correctly, this would be do-able, by govt borrowing and lending-on money for construction projects, because although 'total public debt' will increase, 'net debt' won't, as govt gets an asset in return..

  • rate this

    Comment number 7.

    I don't care what it is called but money needs to be put into the real economy which is struggling but oddly enough is in not too bad a shape. This is despite everything government has done over the last ten years.

    The shrinking part of the economy is the banks. As they currently stand they are a drain on the country and need reform. To get the real economy right we need real investing banks.

  • rate this

    Comment number 6.

    However half-baked, the "credit easing" thing is a belated recognition that there is a need to stimulate growth in the real economy. If the Govt is going to borrow to stimulate the economy through infrastructure investment, so be it: get on with it. But book-keeping sleight of hand is what got us into this mess (a national variant of ENRON?). It may alter the headlines - but won't fool anyone.

  • rate this

    Comment number 5.

    The discussion of Plan B is irrelevant except in political terms. Osborne could completely reverse his plans and would still brazenly claim it to be just a modification or an improvement to Plan A and not represent a Plan B. Some nice new social housing - puts lots of people back to work and most materials are domestically produced to boot , a real multiplier effect.


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