Digging to stand still

 

Of all the bad news unveiled today by the chancellor this might well be the worst: after two and a half years of austerity, the Office for Budget Responsibility (OBR) is likely to say that the fiscal hole that Mr Osborne promised to eliminate in five years, back in May 2010, is actually bigger now than it was then.

Yes. You read that correctly. The austerity has been real: by the end of this tax year we'll have had £59bn's worth of tax rises and spending controls since April 2010. But the hole in the public finances has expanded to absorb it. Or at least, that is the view of the OBR.

When he wrote his Budget, Mr Osborne thought that three years of austerity would more than halve the structural current deficit, from 4.8% of GDP to just 1.9%.

That was before the recovery faltered. And before the OBR took a much gloomier view of the economy's room for growth in last year's Autumn Statement. By April of this year it had decided that Mr Osborne's measure of borrowing would still be 4% this year, for all his efforts.

That was pretty bad - it meant that a squeeze of more than 4% of GDP had shrunk the hole by less than a quarter of that amount.

But when you apply the OBR's model to the economic data we've had since April, it looks very much as though they will have revised up that totemic measure of borrowing, yet again, for this Autumn Statement.

The Institute for Fiscal Studies, for example, reckons the OBR will put the structural current deficit this year at 4.9% - even under its most optimistic scenario, where Robert Chote and his colleagues consider the loss of growth this year to be temporary.

That is what you might call "psychologically significant". Because it means, even on the most optimistic assumptions, the OBR is going to tell the chancellor that the structural hole he set out to fix is actually larger, now, than when he took office. The disease that the chancellor came in to cure has gotten worse since 2010, despite his best efforts.

Usually, when a medicine doesn't seem to be working, you get a debate between those who say it's the wrong medicine - and others who say it's just not been applied forcefully enough.

What's funny about the current situation - and doubtless galling to Ed Balls and other critics of Mr Osborne - is that we are not really having that debate today. Even though these borrowing estimates are themselves dependent on an OBR assessment of the economy which many economists do not share.

On his own chosen measure, we will probably find out today that the chancellor has literally nothing to show for nearly three years of austerity. The majority of institutions and individuals who supported Mr Osborne in 2010 are likely to say two things in response: he's got the right medicine, and the last thing he should do is apply it more forcefully.

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

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  • rate this
    0

    Comment number 55.

    The problem is Austerity is removing tax receipts from people who used to pay their fair share, if they were to concentrate on the areas where we are bleeding revenue that would at least be something....however there seems to be a lack of will to tackle the avoidance creation industry......i wonder why..

  • rate this
    +4

    Comment number 54.

    Not surprising since they have wasted money on Local Chief Constable elections, big society, legal bills and social security bills for anti-British terrorists, inquiries that take too long with dismissed results, train bids (Virgin), HS2 that nobody wants, aid for countries that either don't need it or use it for military purposes, expenses, EU costs and not forgetting subsidized canteen and bar.

  • rate this
    0

    Comment number 53.

    The worrying thing is the lack of a proper debate. I suppose most of us understand paying back a loan but not everyone realises we are borrowing while we're paying back, because we aren't earning enough as a country. And the harder the cuts the worse that will get. Why isn't this being shouted in this financial crisis that some say is worse than being at war? The parliamenttary system fails again!

  • rate this
    0

    Comment number 52.

    In Europe and the US, most politicians, economists and policy advisors are psychologically locked into a failed and obsolete approach; yet they dare not admit they are lost and wrong. If markets had been allowed to clear the failed banks, car companies, etc., we would now be closer to healthy recovery, after a harsh and deeper recession. Instead we have death by a thousand cuts for next 10 yrs.

  • rate this
    +2

    Comment number 51.

    We spend £100bn+ more each year on ourselves than we earn. Bankers bonuses, corporate tax avoidance will barely touch it.
    We are hoping our children will pick up the tab.
    Yet many want more jam today.
    Cuts are needed not just for economic reasons but for morality reasons.
    Public sector feather-bedding has to stop. Time to support the productive wealth creating part of the economy.

  • rate this
    +2

    Comment number 50.

    George for goodness sake stop giving money away in foreign AID

  • rate this
    +15

    Comment number 49.

    This government has had difficulty in understanding the depth of the problem.

    They thought this recession could be resolved like the 1992 recession: a few cuts here, a tax increase there and Bob's your uncle.

    This analysis is absurd: our problems are structural. The future of the UK was built around banks which are now bust and on taxpayer support.

    We need real industry, real work and real hope

  • rate this
    0

    Comment number 48.

    #46 presumably as opposed to the Lab lot with a shadow chancellor that thinks the only solution to any problem is to throw money at it, and when that does not work throw more money at it

    The structural deficit in 2007 was 6% of GDP because long term average tax take in uk is 35% of GDP, Lab were spending 41%

    Govt has not engaged in public sector spending cuts, merely reduced the rate of increase

  • rate this
    +4

    Comment number 47.

    Two years ago we were heading for Hell in a handcart. We still are but the handcart is going slightly slower. Without the cuts we would have been £59 billion worse off, we would have lost our AAA rating, and any chance of pulling back from the brink would have been even more remote. This mess has been coming since WW2. The idea of being able to reverse it in two years is farcical.

  • rate this
    +5

    Comment number 46.

    I relly doubt that this Tory lot can recover the economy

    There are many amongst present Tory cabinet & bank bench who trousered huge sums during Blair and Thatcher, and now sitting very cosy and snug whilst our vulnerable youth are sleeping rough on the winter streets. Lots of qualifications, but no work no money?

    I hardly think these comfortable Tory chaps are the right folk for the job??

  • rate this
    0

    Comment number 45.

    What a conundrum.
    UK/EU & so much of world in serious financial/economic dangerous position = a huge scramble for investment growth & fierce competition.

    Options are give tax incentives for foreign jobs investment in UK- near impossible now due to UK public moral outrage, the "freebies" we give away via UK regional aid is NOT enough to grease the palms of international investors

  • rate this
    +3

    Comment number 44.

    Really?

    Making people redundant, removing their benefits and reducing the pay of the remainder has spurred on demand?

    Amazing!

    I know what - let's make a grab for pensions and any other cash the plebs may've held onto so far.

  • rate this
    0

    Comment number 43.

    Loathe or detest him, Osbourne's problem is the UK economy is one of the most open in the world and is therefore more affected by economic downturn than others.
    His plan was deep cuts in public spending coupled with growth in the private sector would reduce the deficit and soak up the unemployed, boosting government revenue.
    His plan relied more on political dogma than economic reality.

  • rate this
    -4

    Comment number 42.

    So far there haven't been any real cuts, there are still too many public servants, too much cash wasted on benefits, too much squandered on the NHS, too many immigrants draining public services and too many British soldiers tied up in expensive wars of the Labour party's making.

  • rate this
    -1

    Comment number 41.

    What a stupid perception of the issue. What in fact has happened is the so called austerity measures have mitigated a worsening situation than guesses of the future. If they had not been done the hole would be substantially bigger. Further saving money being spent to no use is always a good thing and should be happening all the time. We have not noticed any loss of service, so all to the good.

  • rate this
    +4

    Comment number 40.

    The Chancellor crucially said that his austerity was needed to stop interest rateson government debt rising. Our AAA rating must be preserved. Well, it's the only thing left now, or he's failed. If debt as % of GDP is to reduce, more people need to be paying tax and less need to be claiming welfare. He cannot fix the former, so he has to freeze welfare and public pay and increase VAT or resign.

  • rate this
    +2

    Comment number 39.

    35 Penguin337

    George Osborne studied modern history at university

    So he's not exactly a numbers guy

    -------------------------------------------------------------

    He went to Eton with Cameron......that is all you need to be Chancellor when your mate is the PM!

  • rate this
    +2

    Comment number 38.

    Paul Krugman (Noble prize economist) and Lord Layard issued a Manifesto for Economic Sense which a couple pages give an analysis and a solution. Briefly our govt. (and the US and EU govts) are implementing the solutions which most economists rejected after learning the lessons of the 1930s.
    I strongly recommend reading it.

  • rate this
    -1

    Comment number 37.

    While the structural deficit has indeed grown during austerity, it is impossible to say whether a different approach would have yielded better results.

    Ultimately the reality is that the West must give up the unbalanced proportion of the world's wealth it commands. This means contraction. No government can prevent it, the best outcome is an orderly contraction. So far so good.

  • rate this
    +8

    Comment number 36.

    So, where has all our money gone then? We're paying more (around 73p in every £1 we earn) than we ever have before. We are the highest tax payers in the world. . . . . . .So who's are the grabbing hands now?

 

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