Nuggets hidden deep in the Green Budget


We used to read the IFS Green Budget to find all the unexploded bombs that were lurking in Britain's public finances.

There are fewer to find these days, because most of the big ones have already been detonated, either by the financial crisis or the Office for Budget Responsibility (OBR). But today's report still has some interesting nuggets, even if it does take a while to find them in its (count them) 251 pages.

On the big picture on borrowing and growth, the think tank does not stray far from the official OBR story.

With Oxford Economics, which has provided the macroeconomic analysis in this year's report, the IFS expects growth to be somewhat weaker than forecast by the OBR, but borrowing by 2015-16 to be slightly lower, thanks to slightly stronger tax receipts.

Many economists have suggested that the OBR is underestimating the amount of spare capacity in the economy. The IFS agrees, but there is not much in it. They reckon the "output gap" (the extra slack in the economy) was 3.2% of GDP at the end of 2011. The OBR says it was about 2.5%.

Chart showing spare capacity in UK economy

If there had been no permanent hit to output from the recession, that gap would now be well over 10% of GDP.

As Kevin Daly from Goldman Sachs noted recently, the official story that we have permanently lost at least 7-8% of our national output in this crisis implies that the past few years have done more lasting damage to our economic potential than either World War II or the Great Depression.

You might wonder whether that is too pessimistic, but the IFS is willing to sign up to this basic view, as are most official forecasters such as the IMF and the OECD.

Looking ahead, the IFS is actually gloomier than the OBR when it comes to the likely growth in Britain's potential output over the next few years, which it says will average just 1.6% a year between 2012 and 2016. In 2012, it thinks our potential output will grow by just 0.6%.

Chart showing long-term growth in UK economy

That compares with an average of 3.2% a year between 1997 and 2006 when growth was boosted dramatically by immigration and the mid-nineties investment boom.

Does the poor state of the economy call for a Plan B? The IFS says no. In its view, there is no room for any permanent loosening of fiscal policy, and precious little space for a temporary one either.

It's the familiar catch 22: a small change would not do much to help the economy, but a large change would so hurt the government's credibility that it might not do much good either.

Like the IMF, the IFS does think the case for a temporary stimulus is stronger than it was, and would be stronger still if the economy got any worse.

There are some suggestions in the report for what the government might do, but the IFS is not pushing them yet. In the press conference, IFS director, Paul Johnson confirmed it was "sitting firmly on the fence".

So far, so unexciting, but here are a few other nuggets that I took away from this substantial report:

First, it has some very interesting analysis of the cuts to local authority spending, showing how urban and relatively poorer authorities have been forced to cut more than rural, more affluent ones: both in absolute terms and as a share of their initial budgets.

This is largely because the poorer ones were also spending more to start with, but the difference is striking, nonetheless.

Related to this, the IFS also shows how different local services have been affected by cuts. Spending on planning and libraries has been slashed, but spending on rubbish collection has actually grown slightly, with 1.7% real growth between 2009 and 2012.

There have been grassroots campaigns in support of libraries and rubbish collection: on the face of it, rubbish beat books.

A second useful contribution here is the comparison between Britain's recovery, and those of our trading partners.

Comparison between Britain's recovery, and those of its trading partners

As you can see, we don't come out very well. In fact, of the G7 economies, only Italy has had a weaker recovery.

Is Ed Balls right to blame the government for this poor performance? The IFS doesn't answer this directly, but the third nugget I took from this report is the analysis of how the borrowing forecasts have changed since Alistair Darling's last budget in spring 2010, and the likely explanation for these changes.

As it happens, the current forecast for borrowing in 2016-17 is very similar to what Labour was forecasting in 2010: around £24bn.

Labour would say that demonstrates that the extra tax rises and spending cuts introduced by the coalition have been a waste of time - indeed, may even have hurt borrowing by tanking the recovery.

There's a complicated answer to that question in this report, but the bottom line is that the IFS does not really buy the Ed Balls version of reality.

In the end, it says the borrowing forecast for 2016-17 is much the same as it was in 2010, only because extra austerity has largely offset the extra structural borrowing identified by the OBR since 2010.

The think tank does not think the extra borrowing has been caused by the extra austerity, or not very much of it. It says the "error in estimating the size of the policy impact would have to be implausibly large to lead one to conclude that borrowing would actually have been lower" without the government's extra cuts.

Not a great headline, perhaps - but another small poke in the eye for Ed Balls from the guild of independent economists.

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

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  • rate this

    Comment number 1.

    To recover from depression we need a lot more than just a little tweaking of taxation and interest rates

    We need to move away from the absurd dependency on Financial Services and diversify, separate the risky parts from that industry from the economy-critical parts (the 10-years delayed "ringfencing" is just ridiculous), shun rent-seeking activities and promote creative and engineering areas.

  • rate this

    Comment number 2.

    Stephanie. You are still wedded to the idea that analysis of figures somehow gives us the picture of how well or not the economy is performing.

    Figures mean nothing because they are gathered by those with interests in their outcomes.
    Ditto the analysis.
    Do the results actually mean diddly squat?

  • rate this

    Comment number 3.

    I sometimes wish the IFS and writers at The Economist could join forces and run the country.

  • rate this

    Comment number 4.

    Unfortunastely the problem will not be resolved by the politician doing what is good for the long term (5 Years +) they will take the short view. That said we are to far from an election to start on a round of tax cut.

    The Politicians are as much the a part of the problem as they are a part of the solution.

  • rate this

    Comment number 5.

    Does this report make any mention of the risk for the UK of having a debt of £1 trillion to which the government is still adding by spending far more than it earns each year.

    Whilst this per capita level of debt is only half that of Greece, the tragic tales unfloding there surely warrant economists somewhere considering when and how UK plc is going to pay back this debt?


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