Plan B for the UK?
- 14 October 2011
- From the section Business
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.
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.
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.