Mr Osborne's unwelcome statement
- 29 November 2011
- From the section Business
This statement is every bit as gloomy as forecast. And as predicted, some of the worst news has come not from the Treasury but from the Office for Budget Responsibility (OBR), in its new, gloomier estimate of the amount of spare capacity in the economy, and the scope for faster growth in the next few years.
Here's the shocker: previously the OBR thought Britain's potential output would grow by 2.35% in 2012 and 2013. It now thinks potential output will grow by just 1.2% in 2012, and by 2% in 2013. Crucially, the potential growth rate since 2009 has also been slashed, to just 1% a year, which means the amount of spare capacity now - our room to grow - is smaller than we thought, even though growth has been so much slower.
That is bad news indeed. The only silver lining is that it now thinks our potential will grow by 2.3% after that, somewhat higher than the previous 2.1%. But that estimate for 2012 and 2013, coupled with the reassessment of the boom years and the impact of the crisis, has had a major impact on the extent to which today's new extra borrowing is deemed to be "structural".
As I've debated in the past, these judgments are not cast in stone. Far from it. The judgment whether borrowing is "structural" or "cyclical" is a fine one, at best. Many would say it's downright impossible. Economists will want to question the OBR's numbers - and they ought to. It is accountable for its decisions, even if it is independent.
I'll say a few more words about that in a minute, but first we should savour the symbolism of the fact that the government will not be eliminating the target measure of the deficit in the lifetime of the parliament. Remember that in the spring and early summer of 2010, Alistair Darling's borrowing forecast in 2014-15 was exhibit A in Mr Osborne's case for greater fiscal austerity.
His argument - which was supported publicly by Bank of England governor Sir Mervyn King - was that a deficit reduction programme that extended beyond a single parliament could not possibly sustain the confidence of the financial markets. Because you can't credibly commit to do anything in years when you don't know you will be in charge. Ergo, no government borrowing more than £150bn a year (as we were in 2009-10) could hope to hold on to Britain's Triple A rating, while still proposing to borrow more than £70bn in 2014-15, at the end of a full parliament.
The new figures show that Mr Osborne will be borrowing £79bn in 2014-15. As I pointed out yesterday, that compares with the forecast the OBR made in June 2010, that borrowing under Labour's plans would be £71bn in 2014-15.
Of course, as I also pointed out yesterday, the numbers would also now look very different under Labour. The world has changed. Quite how different they would be will surely now be a matter for heated political debate - though an honest economist would tell you we can never know the answer.
You can imagine Mr Osborne would have been tempted to ask the OBR to run Labour's plans through the new official forecast. Except they have expressly forbidden the OBR from considering the consequences of alternative government policies. So, to fend off this line of attack Mr Osborne instead seems to have asked the Treasury to come up with its own estimate of borrowing in that alternative - Labour - universe. He claims that borrowing in that more profligate universe would have been more than £100bn higher than currently forecast over the next few years.
Again, the truth is we will never know whether growth would have been higher - or lower - under Labour; or what the short and longer term outlook for borrowing would have been; or, come to that, what the market interest rate on UK government debt would be now, though Mr Osborne certainly believes it would now be much higher.
Let me say a few words about the change in the longer term growth forecast. We have to wait for the explanation from the OBR itself, but the chancellor says Robert Chote and his colleagues have looked at the years leading up to the crisis, and decided that growth was even less sustainable than we thought. That means the permanent loss to output, from the crisis is that much higher, and the scope for what we would call a decent recovery is even smaller than we thought.
You might ask why the OBR is so much gloomier now than it was eight months ago, when it thought our economy could grow by 2.3% a year over the next few years. After all, nothing about the financial crisis - or the years leading up to it - has changed much since then. I will ask Robert Chote just that when I see him, though Mr Osborne suggested they have also taken account of the jump in imported inflation over the past few years, and the impact that has had on business costs.
But Ed Balls' response to this statement is interesting too. Why? Because you can now criticise the government for being too rigid in its borrowing plans, not spending more to support the economy in the face of a radically different global environment.
The FT's Martin Wolf, for example, made this argument very strongly last week. Or, you could criticise Mr Osborne for being too flexible, for allowing past borrowing targets to be missed and appealing, in Gordon Brown fashion, to the fiscal mandate's fine print. But Ed Balls wants to lambast him for both of these failings - simultaneously. Quite a feat.
Another tidbit from the Green Book:
The borrowing forecast for 2014-15 has almost doubled, as a share of GDP, from the 2.5% of national income forecast in the Budget, to 4.5% now. The structural deficit - the bit that won't go away with economic growth (supposedly) - has gone from 1% of GDP to 2.8%. In other words, the structural deficit forecast for that year has almost trebled as a share of the economy, in just 8 months. Though it is still much lower, obviously than this year's 6.4% of GDP.
The stock of debt in the last year of the Parliament will be 78% of GDP, not 70.5% as previously advertised, and the fall in the following year, which has to happen if Mr Osborne is to meet his second fiscal rule, is very small indeed. The forecast shows it falling from 78% of GDP to 77.7%. Given the revisions we have seen today, that is what you would call well within the margin of error.
We're not just going to grow more slowly, our growth is going to be more imbalanced. If you look at Table 1.1 of the Green Book, the forecasts for net exports and investment have been revised down in 2012, 2013 and 2014, whereas the forecasts for public consumption have been revised up for those years, and household consumption in 2014 and 2015 has been revised up.
Sorry to say, parts of this "gloomy" forecast still look optimistic. In March the OBR thought business investment would grow by nearly 7% in 2011. It now thinks private investment will fall, by 0.8% in 2011, but it nonetheless continues to expect it to rise by 7.7% in 2012, with even higher annual rates of growth thereafter. If there is a recession in the Eurozone - and goodness knows what else, as a result of continued worries about the Euro, it is difficult to see how that forecast for 2012 would be achieved, either.
That same chart also shows how the outlook for employment has deteriorated. Cumulatively, there are 300,000 fewer new jobs built into this forecast than the one in March, though the OBR still expects total employment to grow between now and 2015, by about 500,000.
Correction: I misread a chart in the OBR report on Tuesday. There are 300,000 fewer new jobs in the latest forecast, not a million.