Osborne, Balls and the OECD: Where they agree
- 28 November 2011
- From the section Business
George Osborne and Ed Balls had to cosy up on the sofa on the Andrew Marr programme this weekend. Believe it or not - their approach to the economy is moving closer as well.
This might come as a surprise to many of you. After all, when it comes to the rhetoric, the chancellor and his Labour shadow seem poles apart. The central motif of this Autumn Statement is that "there will be no Plan B" - whereas Mr Balls can barely draw breathe these days without begging the government to re-think.
And yet, when you cut through that rhetoric, you'd have to conclude that they do agree on key fundamentals about the economy - and even on the government's limited capacity to turn things around.
Certainly, everyone can agree that the UK recovery has not gone as well as either Alistair Darling or George Osborne hoped, in the spring of 2010. This is brought home, once again, by the OECD's latest forecast, which shows the eurozone dipping into recession in the next six months, and the UK shrinking or stagnating over this period. The forecast is for growth of just 0.3% in the euro area in 2012, and 0.5% in the UK.
The OECD has been largely wrong in the past few years, but in this they agree with many private forecasters - and the likes of the European Central Bank (ECB), which has also suggested that the eurozone is likely to slip into recession. The Bank of England's latest forecast shows Britain stagnating for at least the next six months.
Osborne and Balls would also agree that weak growth has had a major effect on government borrowing. How major, exactly? I wrote about this in detail last week, and we will find out the new numbers tomorrow. But I suspect Mr Balls will be keen to compare those figures with the forecasts the Office for Budget Responsibility produced in June 2010, before Mr Osborne's first Budget.
In effect, that first report from the OBR was its more independent take on the old government's fiscal projections. It was gloomier than the Darling Treasury had been about the size of Britain's structural budget deficit. But overall, the forecasts for borrowing over the next five years was not greatly different to the previous forecasts. It suggested that net borrowing in 2014-15 would be £71bn, or 3.9% of GDP.
The best guess of independent forecasters is now that borrowing in that year will be… £81bn. In other words, higher than the OBR forecast would have happened under Mr Darling.
Of course, a lot has happened since then. Any Labour chancellor would have seen his forecasts drastically revised over the past 18 months as well. Messrs Balls and Osborne would certainly disagree on whether borrowing at the end of the parliament would have been a lot higher - or lower - under Labour. And they would disagree on the cause of that slower than expected growth: Ed Balls would say it was down to the government; the chancellor says it was the euro, and an uncooperative global economy.
But the different proposals coming out of Treasury in recent days show that Mr Osborne does now agree with Mr Balls and other critics on one important point - though don't expect him to put it that way in public. He's admitting that in the wake of a financial crisis, monetary policy alone is unlikely to revive the economy, or at least not without some help.
Each of the schemes announced over the past few days - whether for infrastructure, for housing and for "credit easing" for small businesses - in their different ways respond to the same reality: that super-loose monetary policy, for one reason or another, has not kickstarted private sector activity as it was supposed to. Either low interest rates have not got through to households or businesses because the banks need to make a higher margin on lending now to rebuild their balance sheets - or companies have plenty of money to invest, but they're too nervous about the future to do it.
The new Treasury schemes try to take advantage of the government's super-low borrowing costs to address both these problems: in effect, they're using government guarantees to cut the margin between base rates and the interest rate charged to small businesses; or in the case of infrastructure, to "de-risk" these projects from the standpoint of private contractors, so they go ahead. As one Treasury adviser explained it to me, they're using the government's good name to stand in for the Keynesian "animal spirits" in the private sector which are now so clearly lacking.
You can expect Ed Balls to make much hay with this tomorrow, along with the higher borrowing numbers, and the falling forecasts for growth. Because the heart of the "Keynesian" critique of Mr Osborne's approach has always been that there were rare times when monetary policy did not work very well, and that now, just after a major financial crisis, was one of those times.
You've heard the basic argument many times before. The thought is that when banks, households and companies all want to strengthen their balance sheets and run down debt, you might not be able to get them to borrow more, however cheap it might be to do so. If the economy is going to keep growing, in these circumstances, the argument would be that the government has to borrow instead.
Mr Balls says this was the lesson of the 1930s, which the Treasury is now forcing us to re-learn.
All of which makes for very fine rhetoric. Except, if he is right and we really are facing a catastrophe comparable to the Great Depression, it is reasonable to ask whether cutting VAT from 20% to 17.5% is really a match for the occasion. You can debate the cost of Labour's "five point plan for growth", but given that a good part of it is funded through higher taxes on banks, the net impact is unlikely to be more than 1% of GDP.
You have to conclude that Mr Balls agrees with Mr Osborne that, from where we are right now, the room for the government to kick-start the economy is pretty limited. The only real debate between them - and it is a real debate - is whether it's worth formally breaking the government's promises on borrowing to do what you can.
Mr Balls thinks a short-term fiscal stimulus would pay for itself, at least over a few years, and would not seriously jeopardise the government's standing in financial markets. So, incidentally, do some right-wing critics of the chancellor, who are lobbying for immediate tax cuts. But many in the city would still agree with Mr Osborne, that the short-term benefit for the economy of any stimulus would be small, and the long-term costs for the government's credibility rather large.
It's up to you to decide which is right. There are plenty of clever people on each side. But when it comes to the gloomy reality facing the UK over the next few years, I'm afraid the chancellor and his opponent are more or less agreed.