Statement of the gloomy obvious
- 22 November 2011
- From the section Business
That sound you've been hearing around Westminster is the sound of expectations being ratcheted downwards. The prime minister told the CBI yesterday that we were "well behind where we need to be", and stressed that Britain's high levels of public and private debt were "proving to be a drag on growth".
"Well, tell us something we didn't know", might be the response of many of you. But the timing is significant: almost exactly a week before the chancellor's Autumn Statement, and Mr Cameron's tone was similar to many conversations I have had in recent days with Whitehall insiders.
The bottom line is that next week's statement is not going to be fun for the government or, I'm afraid, for all of us. You can see why they would want to prepare the ground.
It's not going to be fun for George Osborne because he is going to have to announce substantially higher borrowing numbers through to the end of the parliament, even though the borrowing figures so far this year have been broadly as forecast.
Ed Balls has already made hay with the "more than £100bn" increase in the borrowing forecasts of independent economists since last year's pre-Budget report. As my colleague Hugh Pym points out, the increase in the forecasts since the Budget in March is not as great: the latest (November) consensus forecasts for net government borrowing between 2011-12 and 2014-15 are about £73bn higher than the OBR's forecasts in March.
But that will sound like a lot of extra borrowing to most people, even if it does pale in comparison with the hundreds of billions of extra borrowing that Alistair Darling had to announce, in 2008 and 2009. I'll be surprised if the revision in the official borrowing numbers next week is a lot smaller than the change in the private forecasts, especially given what the OBR is likely to say about the future growth rate (see below).
Will Mr Osborne still meet his two fiscal rules? Economists at Barclays Capital have tried to mimic the likely calculations of the Office for Budget Responsibility. They reckon that the chancellor will be able to say he's meeting his borrowing target, but only just, and only by taking advantage of the fine print.
That chimes with what I have been hearing in Whitehall. What does it mean in practice?
The so-called fiscal mandate says the chancellor has to balance the "current, cyclically adjusted budget" over five years; that's the structural piece of the deficit that is not due to spending on public investment. Back in April, Mr Osborne was going to meet this target a year early, in 2014-15. The new forecasts look set to show the gap closing by 2016-17, and it may only be 50-50 that he manages that.
If he's hitting the target two years late (and only after the next election) the more innocent among you might wonder whether he's missed his five year target after all? But that would be ignoring that crucial fine print.
As I've noted in the past, the rule actually says he has to balance this measure of the budget over a "rolling five year forecast period". The other sound you've been hearing in Whitehall is the sound of rolling forecast periods, rolling forward. So it's goodbye, 2015-16 and hello, 2016-17.
It is not so easy to dispense with the second, debt target, which Mr Osborne imposed on himself, which requires public sector net debt to be falling as a share of GDP at a fixed date of 2015-16. He had leeway here as well: the Budget forecasts showed debt falling from 2013-14 onwards. My sense is that all of that room for manoeuvre has now gone.
But, as Treasury officials have pointed out to me in the past, he only has to show debt falling that one year. It could easily go back up again in 2015-16.
Also, when you think about it, that fixed date is not so very fixed. Does it mean falling, relative to 2014-15, or on course to fall from 2015-16 onwards? Strictly speaking, 2015-16 is not even a date: it is 365 dates.
In short, the debt target is one that the chancellor is unlikely to miss, but both are looking pretty tight.
So much for the chancellor's bad news. What about the bad news for all of us?
The bad news for all of us is that the OBR thinks the economy has got less room for manoeuvre as well. If the OBR has followed the same methods it has used in the past, it will have informed the Treasury that the UK now has less room to grow over the next few years, even though growth in the past year has been so much slower than forecast.
Put it another way: the OBR has looked at the growth we've lost over the past year and decided that we're not going to get it back. It seems also to have decided that our trend rate of growth, at least over the next few years, is lower than it previously thought.
What would this mean in practice? The forecast in the Budget was that the underlying potential of the economy would grow by 2.35% a year between 2010 Q3 and 2013 Q4, and by 2.1% a year after that. If the OBR now thinks our potential output is going to grow more slowly than this, that would be bad news indeed, especially if the OBR turned out to be right.
Remember why a lower trend rate of growth matters: it matters because it would mean that even with a deeply lacklustre recovery, the Bank might be forced to raise interest rates to curb inflation rather sooner than expected. It would also suggest that unemployment will remain higher for longer. Oh yes, and it would mean that Mr Osborne or his successor might have to announce even deeper spending cuts or larger tax rises in the years ahead. As I said, bad news indeed.
Assume the Autumn Statement follows roughly this script - what follows from that?
That's a subject to consider more carefully in the days to come, but we know Mr Osborne and Mr Cameron will see the gloomy figures as more evidence that they were right to take the stance on borrowing that they have.
The implicit suggestion will be that if borrowing is this high with the coalition in charge, imagine what carnage we'd be looking at if Mr Balls or Mr Brown were still in power and what that would have meant for Britain's standing in global markets.
Ed Balls will say precisely the opposite: that the extra borrowing is evidence of the costs of the coalition's budget strategy, not its importance. By stifling growth, he will say, the government has not only tanked the economy, it's made the public finances even worse.
The new figures won't settle this argument, but you can see why Mr Cameron would want us to be well prepared.