An economic mid-term review


One message that David Cameron and Nick Clegg supposedly want to get across with their mid-term review is that the coalition is about more than the economy.

Cutting the deficit and promoting growth are crucial, but, we're told, the two parties in government are united in their desire to make progress on other fronts as well.

"And a good thing too", many economists would add. Because a simple economic stock-take of the coalition's first two-and-a-half years in office would not look very impressive at all. No-one knows what would have happened under alternative management. But we can say that - on borrowing, growth, and the rebalancing of the economy - the coalition has fallen far short of its hopes.

This is hardly a revelation: we and the coalition have been learning to live with economic disappointments almost since day one. But amid all the rhetoric today about the coalition's achievements, I thought readers might find it useful to have a few key statistics. There are plenty to choose from: here I'm highlighting a magnificent - or not-so-magnificent - seven.

The first is government borrowing. As Mr Cameron and other senior government members keep reminding us, the coalition has cut its target measure of borrowing by 25%. But their original plan was to cut it by 60%. And even the 25% figure depends on which measure of borrowing you use.

Overall, net government borrowing is on course to be about a third lower as a share of GDP than when the coalition came in: it's forecast to be 6.9% of GDP in 2012-13 (excluding the temporary effect of transferring the Royal Mail pension scheme), compared with 10.1% of GDP in 2010-11.

But, that was not the measure that the coalition came into government to eliminate over the course of the parliament.

The target measure was structural borrowing for current spending (the "cyclically adjusted current budget balance"). This has fallen from 4.8% of GDP in 2010-11 to a forecast 3.6% of GDP in 2012-13 - which is indeed a fall of 25%.

But that is only thanks to the decision to transfer back to the Treasury the interest that the Bank of England is paying on government debt purchases as part of quantitative easing. Without those transfers, the target measure of borrowing would be 4.3% of GDP in 2012-13 - or just 10% lower than in 2010, despite two years of austerity.

What about debt - that is, the stock of all the debt that has been run up in the past? In this context, Mr Clegg did once (unforgivably) talk about "wiping the slate clean". That was never on the cards, or in the coalition's forecasts, but you might still be disappointed to hear that the government's net debt has risen by 27% in cash terms in the past two years, from £932bn to £1.186tn - or from just under 62% of GDP in 2010-11 to nearly 75% of GDP now.

Of course, a lot of this disappointment has a single cause: the poor performance of the economy, and the OBR's judgment that a lot of the economic ground we had lost since 2007 we were not going to get back - meaning the books were in a worse state in 2010 than the coalition realised at the time.

The mid-term picture on growth is that the UK economy has expanded by just 0.8% since the middle of 2010. When the coalition came in it was hoping for growth of nearly 6% in this period.

As we know, jobs have been the great and often debated bright spot in all this. There were 29.1m people in work in the UK when the coalition came to power. The latest count shows there are now roughly 480,000 more - with a 1 million increase in the number employed in the private sector easily offsetting the fall in public sector employment since the middle of 2010.

The unemployment rate is more or less where it was in 2010, at around 8% in 2012. The OBR expects it to creep up slightly in 2013 and stay at or above 8% through to the election. In other words, it is expecting unemployment to be the same at the end of the parliament as it was at the start. In normal times, that would sound hugely disappointing. But given what has happened to the other economic statistics, it could be a lot worse.

George Osborne would say that UK in general would have done worse, if he had not restored confidence in the UK's budget position (ignoring, for the moment, the fear that the UK will lose its top AAA credit rating this year, for all his efforts). But that is probably not how most households see it, looking at their pay packets.

Average weekly earnings have risen by just under 5% since May 2010, while the cost of living has risen by nearly 9%. In other words, real wages, on average, have fallen by around 4% since the election. And even that average figure does not take account of many tax and benefit changes which have cut disposable income even further.

Finally, what about that goal of re-balancing the economy - getting exports and investment to replace the demand that the government and consumers can no longer afford to provide?

Well, exports have been going up - volumes have risen about 9%, overall, since the coalition took office, helped, presumably, by the big fall in the value of sterling at the start of the financial crisis. That compares with just over 4% growth in imports.

That is encouraging. But arithmetically, it's nowhere near enough to re-balance the economy, especially when domestic investment is still weak, and the income we earn from our investments abroad has fallen off a cliff. You might be shocked to hear that the OBR expects Britain to run a current account deficit of 4% of GDP in 2012 - that's the worst figure this century and 60% higher than in 2010.

That's a lot of numbers, many of which government ministers were in a poor position to control. But, however the coalition might be doing in politically at this halfway point, it's fair to say that the economic side of the ledger is not looking healthy at all.

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

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  • rate this

    Comment number 27.

    Previous budget balancing was 50% taxes, 50% cuts, Tory dominated coalition went for 75% cuts, ideological stance, doesn't look to close tax loopholes and change laws, instead makes more loopholes. We are not all in it together

  • rate this

    Comment number 26.

    So far the government has done little more than prove it doesn't understand housing, lending or banking. Today's announcement says more lending and higher LTVs with money it doesn't have. All this and the banks are still allowed to make it up as they go along creating mortgages from erroneous stats. More:

  • rate this

    Comment number 25.


    To which country do you refer, cos the "facts" you quote do not apply to the UK ?

    Labour increased Public Sector by 1M+ so, to answer your question, these cuts will start to bring the economy back into balance and reduce the need to borrow huge amounts every year.

    btw, if you want to talk about unemployment, check out the stats from 2007 to 2010 and remind us all who was in power

  • rate this

    Comment number 24.

    Saving/debt reduction

    Key to ending recession is to know what caused it i.e. malinvestment caused by credit expansion. Only way is through more saving & hence formation of capital goods which can be used to make projects profitable & thus avoid bust. You cannot solve debt problem by creating more debt. Lesson of woes of G look no further than Japan.

  • rate this

    Comment number 23.

    How come Fannie Mae settled for just $12bn from Bank of America - they must have lost 10 to 100 times that?

    This US problem describes the nascent UK problem. When house priced re-set to rational level (so that business and people can afford to use property in competitive business settings) the UK lenders will find the same sized hole.

    Till debt/asset prices fall the economy can not recover!

  • rate this

    Comment number 22.

    From a business point of view the Coalition has been a disaster.

    High rents & property costs, increasing business rates, more bureaucracy, transport costs at record levels, massive increase to postal charges, continued overspending and hence a lack of real cuts where they count for the great mass of consumers.

  • rate this

    Comment number 21.

    Coalition Govt’s austerity policies are failing. They are failing to create jobs, & failing to generate growth. Unemployment is rising (is now at its highest for 18 yrs, with youth unemployment the highest on record). Living standards are falling. Despite this, Coalition has pledged to cut 730,000 public sector jobs by 2017 & to cut spending by £80B.
    Where will these "solutions" bring us?

  • rate this

    Comment number 20.

    @17 - yes it is interesting that despite the media hype the Govt hasn't actually cut very much at all from central budgets - NHS spending hasn't really been touched (despite media emphasis). Most budget work in local and central govt has been pre-emptive knowing it will be cut.

    We haven't got any austerity - Euro countries cut pay by 25%.

  • rate this

    Comment number 19.

    When the Crash started, Labour blamed everyone else e.g. Financial Institutions etc...
    Since the Coalition came to power, apparently all our ills have become entirely the Government's fault !

    It is quite amazing that some still appear to believe Balls' "more of the same" policies of borrow n spend that got us into this mess in the first place!
    Wasn't he in the Treasury when the crisis hit ?

  • rate this

    Comment number 18.

    #6,9 fallingTP - off fiscal cliff - Deregulate, slash workers rights & let interest rates rip!

    Thatcher & Major provided deregulated financial services in 80's & 90's. Result?

    Hire & fire - global capital shuts down UK operations more quickly than on mainland Europe; lost jobs & investment.

    Early 90's interest rates = negative equity, mass repossessions. We've higher differentials already.

  • rate this

    Comment number 17.

    14.BluesBerry " Scale of Coalition’s intended austerity measures are on a scale never seen in modern Britain."

    Not only that, but they haven't started yet!

  • rate this

    Comment number 16.

    We are all now Japanese. The economic outlook is for another 20 years of sluggish quasi recovery (aka a repeat of the 1870 Long Depression.)

    The dreadful duo don't understand ANY economic history lessons so believe their platitudes - but until the private property based debt bubble is deflated and asset prices fall to an economic level there can be no recovery.

    Bust banks cannot be reflated!

  • rate this

    Comment number 15.

    9. Nope.

    Unquestionably idle resources incl labour which could be put to productive use. But problem is govt hopeless at identifying resources or productive uses they can be put to - it does not know. Nor can it use whilst leaving rest undisturbed. It cannot find right “idle” tools. If you pay people to work without tools or give them wrong tools or pay them not to work....

  • rate this

    Comment number 14.

    Since 2008, British Coalition has pumped more than 375B pounds into banking through bailouts & unconventional measures, but very little has flowed back into the economy. This is failure with a capital F.
    Coalition has tried to balance budget with massive cuts in public services, jobs & wages. Scale of Coalition’s intended austerity measures are on a scale never seen in modern Britain.

  • rate this

    Comment number 13.

    Nothing has changed since 2008 has it? The fact that the dreadful duo exude confidence is only about '2 years to the election' isn't it?

    The banks are still bankrupt - for if they were not they would be able to pay a proper risk based price for their capital - and they most definitely can't, can they?

    The mistake the dreadful duo make is to believe that reducing state borrowing fixes anything!

  • rate this

    Comment number 12.

    We have a money system based on debt. We pay interest on that debt. How can it be possible for UKGov to reduce 'debt' by reducing spending? At best, all it can do is pass the debt on to someone else. In view of the possibility the some one else may be me, I'd rather they keep their debt.

  • rate this

    Comment number 11.

    9 FTP
    "If producing growth is merely predicated on govt spending then why does govt not spend for growth in times of prosperity?"

    GDP = C + I + NX + G
    C - Household Consumption, I - Business Investment/spending, NX - Net Exports and G - GOVERNMENT SPENDING.

    If govt spends too much when the economy is at full capacity, it causes inflation to accelerate out of control.

  • rate this

    Comment number 10.

    6 fallingTP
    "Instead left in a situation where Govt still spends almost 50% of gdp crowding out much private sector activity.."

    How can there be crowding out of the private sector with nearly 8% unemployment. Unless you think unemployment rate that high represents an economy at full capacity. Crowding out only occurs when the economy is at full capacity.

  • rate this

    Comment number 9.

    7. If producing growth is merely predicated on govt spending then why does govt not spend for growth in times of prosperity?

    Govt needs to do is remove interest rate distortions, get out of the way & let market work whilst removing distortions - barriers to employment, tax distoptions, remove employment regulations

  • rate this

    Comment number 8.

    To improve the economy requires people to increase spending without taking on debt. This requires confidence but the media always temper good news with a bleak outlook and emphasise bad news with an even bleaker outlook. 66% owner occupies have much lower mortgage payments way in excess of inflationary pressure but have chosen to pay £31Bn off their debt rather than spend - why?


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