Autumn Statement: A wintry statement of reality

  • 4 December 2012
  • From the section Business
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In a strange way, George Osborne came out of last year's Autumn Statement fairly well. It was the economy and the public finances that got hammered, by the Office for Budget Responsibility's gloomy re-assessment of the UK's room for growth.

Unfortunately, it looks as though the OBR will have more bad news for us on Wednesday.

How will that work out for the chancellor this time? Last year he could say it was bad news, but he was taking it on the chin. That wasn't so great, but it was a lot better than the story on Budget day five months later, when there was not much economic news to report, but plenty of small-scale moves to raise money, which were later felt to have been half-baked.

Growth forecasts

For better and worse, tomorrow is likely to feel more like the Autumn Statement than the Budget. The focus will be on the OBR's new forecasts for the economy and the deficit, and the implications for Mr Osborne and all of us.

We know one big piece of old news on Wednesday will be that the economy has once again failed to deliver.

At the time of the Budget the OBR was hoping for 0.8% growth in 2012 and 2% in 2013. The consensus among independent forecasters is now that the economy will shrink slightly, by 0.1%, in 2012 and rise by just 1.2% in 2013.

Another related piece of bad news is that the OBR might well have told the chancellor he needs an eighth year of austerity, in 2017-18, to get rid of the structural current deficit. (That's the measure he has focused on, which covers borrowing that is not for investment and not considered to be a temporary effect of slow growth.)

The fiscal mandate Mr Osborne set himself in June 2010 stated that he had to get rid of the deficit on that measure in the space of five years. But happily, the rule didn't specify which five years. Last year he had to say it would be the five years starting in 2011. We may find this week that the clock has been re-set again, to 2012.

As you probably know by now, the second rule Mr Osborne set himself does not have the same wiggle room, because it also contains a firm date.

It says that net debt as a share of the economy has to be falling in 2015-16. There are very few people left in the world who think that it will, or at least not without aggressive new cuts or some very creative accounting.

It will clearly be bad news for the chancellor if he has to abandon such a key target - bad news which the shadow chancellor, Ed Balls, will be keen to exploit.

But George Osborne has two massive advantages in trying to explain away this bad news which are hard for his opposite number to match.

The first advantage is that the squeaky clean and independent OBR is likely to give him a good alibi. The OBR will say the chancellor is finding it harder to get a grip on borrowing and debt because of the state of the economy, not because of any backsliding on the austerity measures themselves.

Ed Balls, the National Institute for Economic and Social Research and some others think the weak state of the economy is partly Mr Osborne's fault, or at least something he ought to have taken more account of in drawing up his original plan.

The eurozone crisis, for example, was already in full swing in the summer of 2010. The OBR does not agree.

In the OBR's view, the lesson of the past two years of disappointments is that the financial crisis did more damage to the economy than we thought, and the eurozone crisis and rising energy and food prices have done more damage on top of that. Its director, Robert Chote, does not seem to think the past two years casts any doubt on Mr Osborne's original plans, which, of course, the OBR endorsed.

Mr Osborne's second big advantage is that many of the distinguished outsiders who backed his "consolidation in one parliament" plan in 2010 have now said publicly it makes sense to ease up.

Sir Mervyn King, the Bank of England governor, said that it would be acceptable to abandon the debt rule.

The International Monetary Fund has gone further. It has said it would be a mistake to impose costly new budget cuts before 2015 simply to meet the rule, and if the bad news continues, the chancellor could well need to cancel some of the squeeze that is in store for 2013.

But, in case you're wondering, the IMF doesn't think any of this casts doubt on Mr Osborne's original plan either. Some of her staff might think differently, but the managing director Christine Lagarde has said the Fund was right to support a five-year plan in 2010 - just as it is right, now, to support a slower one.

So, we will have plenty of theatre over Mr Osborne and his rules, and probably some tricky implications for future budget policies, including more detail on how the post-2015 austerity, which was flagged last year, will be divided across tax rises, welfare cuts and further cuts for government departments.

The big thing to remember is that this is an austerity programme which is not even half way through.

Of the £155bn in austerity measures now planned by 2016-17, only £59bn will have come into force by the end of this fiscal year. Nearly all of that £59bn has come through tax rises and cuts in investment. The squeeze in spending, on that measure, has barely begun.

In a sense, we already know what the story will be from the Autumn Statement. But for the chancellor - and his opponents - a great deal will depend on the telling.