Chancellor’s return to 1948

Autumn Statement document

There are a number of striking assertions by the Office of Budget Responsibility, whose forecasts underpinned the chancellor's Autumn Statement.

One is that by 2018-19, when the OBR expects the budget to be in surplus, as a result of a projected fall in the annual deficit by a remarkable 11.1% of GDP, government's "consumption of goods and services - a rough proxy for day-to-day spending on public services and administration - will shrink to its smallest share of national income at least since 1948, when comparable National Accounts data are first available".

This is pretty amazing. And it is because, on the OBR's analysis, around 80% of the reduction in public sector borrowing is "accounted for by lower public spending" - by what we have come to call austerity.

To be clear, these are predictions, not this moment's reality. And they would require a government after the 2015 election to stick to this administration's targets for taxing and spending, and translating those targets into budgets for individual ministerial departments.

Start Quote

If the recovery is going to be sustained for any length of time, business investment has to bounce back after the many long years of stagnation, and exports have to recover”

End Quote

And the hypothetical nature of those longer-term targets are made clear in the Treasury's Autumn Statement book, because it does not - for example - make any provision for Nick Clegg's cherished, £755m-a-year policy of providing free school meals to the youngest school children beyond 2015-16.

But it shows that if George Osborne were to remain chancellor after the election, the austerity would roll on and there would be a significant reduction in what many would see as the state.

Now, for what it's worth, the OBR points out that on these forecasts, there will be a surplus on the "cyclically-adjusted current budget of 1.6% of GDP in 2018-19 which, it says, implies "significant headroom against the fiscal mandate".

Or to translate, the Tories could promise tax cuts in the run-up to the 2015 general election and still claim to be prudent (in its view of prudence) - as per my note of earlier today.

But what about the issue of more immediate concern to most of us, the strength and durability of the recovery?

Well on this, the OBR is cautious.

It points out that the first serious growth the UK has enjoyed since 2008 is being fuelled by what it calls "the unexpected strength of private consumption" which has "largely come from lower saving, not higher income".

In other words, households - whose finances in aggregate have still not been adequately mended, with household debt still high at around 140% of disposable income - are spending money they don't have.

Which means that if the recovery is going to be sustained for any length of time, business investment has to bounce back after the many long years of stagnation, and exports have to recover.

Strikingly, the OBR doesn't anticipate any marked improvement in net trade for at least five years. But it does forecast a significant 5% rise in business investment next year and sharp annual rises of almost 9% in the three succeeding years.

Goodness only knows how much of that will actually be delivered.

But it is necessary, if we're going to start feeling better off, after the bleak economic winter in whose thrall we've been since the Crash.

Here is the thing.

The OBR says that a "recovery in productivity growth is perhaps the most important judgement in our economy forecast".

Because unless the output of British workers improves, there will be no durable rise in wages or living standards. And all that belt tightening of recent years would have been for nought.


Here is something a bit odd.

Despite the economic recovery, the return to strong-ish growth - which the OBR did not expect in March - the OBR believes that the public finances have actually worsened a bit.

In the Budget, it expected a tiny 0.1% surplus in the cyclically adjusted current budget in 2016-17 (the Budget adjusted for the ups and downs of the economic cycle, excluding capital spending).

Today it downgraded that forecast, so there would still be a tiny 0.2% deficit in that version of the budget in 2016-17.

And there was a similar small downgrade to the 2017-18 forecast of deficit improvement.

Now these changes may be minor. But they are a bit counter-intuitive.

The OBR seems to be saying that, although this recovery seems to be strong, it is completely cyclical, a catch-up of some of the output lost in the last few years of stagnation.

Or to put it another way, the OBR implies the underlying growth rate remains worryingly low.


Where I think debate between economists will rage (as if you care) in relation to the OBR's forecasts and the Autumn Statement is over whether the OBR is being too pessimistic about the size of the so-called output gap and the UK's worsened prospects to improve productivity.

This is essentially a judgement about how long the current growth rate can be safely sustained, which in the OBR's view is not very long at all.

For what it is worth, the Bank of England is rather less pessimistic about this.

Which produces an odd contradiction.

Which is that the OBR presumably believes that growth at the current rate would fuel inflation, and force the Bank of England to put up interest rates.

But the Bank of England, which sets interest rates, apparently takes a different view.

So right now, the economic judgement on which the government is setting plans to tax and spend seems to be somewhat at odds with the judgement of the Bank when determining the price of money.

This contradiction feels weird.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 332.

    Glad you're still there, I've been 'donating' to HMRC for 41 years ! Balancing the books isn't always about reducing expenditure you have to raise income as well. But then that won't win them the next election will it.

  • rate this

    Comment number 331.

    What he has failed to acknowledge is nobody is going anywhere until we get control of our numbers.

    I'm afraid denial is not an option.

    1.5 Earths currently needed even as we rape this one !

    Putting living standards above sustainability is a losers game.

    What is needed is intelligent understanding that our numbers are unsustainable & that our thinking & policies must revolve around that fact.

  • rate this

    Comment number 330.

    327. All for All "final two stages" ... inadvertently might serve purposes beyond the secular argument"

    I doubt any use of the resultant figures would be "inadvertent", as regards that attempt. The overwhelming redistributive effect is at the first two stages, however, taking a 14:1 ratio between gross incomes (top quintile to bottom quintile) down to 5:1. The "final two stages" take it to 4:1.

  • rate this

    Comment number 329.

    the sanity of living within our means 328

    That will never happen, Tory or Lab. Try emigrating to Utopia.

    Before Gov starts offering free meals to anyone it should sort out the 'free' meals it offers already, in hospitals. Once all those new school kitchens are built who will do the cooking? Nigella? We had to have a celeb chef at our local hospital to teach them how to make soup.

  • rate this

    Comment number 328.


    Taxation is a protection racket: pay up or jail, we'll "protect" you if you pay.

    We live in a fool's (Socailist's) paradise where everything can be paid for by HMG or debt & no need for individual responsibility. So called "Austerity" is merely a return to the sanity of living within our means. Good on George. Keep shrinkng Blairs's, Brown's and Balls' bloated state monolith.

  • rate this

    Comment number 327.

    Grounder @325
    "no adjustment"
    For use impossible in
    "value of services"
    I wonder, just "a bit of fun"? Those "final two stages" (imputed average VAT, imputed average service-use) inadvertently might serve purposes beyond the secular argument & international league-table, to hide from tender hearts the reality of our inequality, the implication for political spend-equality towards 'representation'

  • rate this

    Comment number 326.

    "peasants scratching around in the dirt."

    I believe that is what peasants do. In fact it characterises all forms of farming & as CAP tends to esure that peasant farming has survived in Europe long after it should have ceased then I suggest you blame the EU if you have any objection to people "scratching around in the dirt."

  • rate this

    Comment number 325.

    @324 All for All "Is the value discounted..."

    No. There is also no adjustment for being childless or paying for private provision. These are good reasons for ignoring "final income" ("just a bit of fun...") and focusing on disposable income, where households can begin to adjust their priorities. It is relevant, though, that the final two stages further reduce inequalities across the distribution.

  • rate this

    Comment number 324.

    "original income + cash benefits - direct tax - indirect allowance + 'services'…"

    Is the value discounted of 'state education' for those who 'know' in all likelihood little good in their primary years & none from secondary?

    Perhaps due pay for helping teachers toward targets for own careers, for their institutions, for politicians after still higher glory?

    The inequity of it all

  • rate this

    Comment number 323.

    Lets face it the tories idea of economic utopia is as follows;

    -small state (less regulation)
    -low tax
    -wealthy elite
    -peasants scratching around in the dirt.

    They've made progress on the last two, but need more time to achieve the first two. I won't be voting for them and neither should anyone else who earns less than £250k a year.

  • rate this

    Comment number 322.

    I realise this may upset some of you but I found the Statement largely positive. Measures for building of infrastructure and housing and closing tax loopholes (all long overdue) and continuing the long slow battle to cut govt waste & reduce public sector spending and thus regain control of public finances. It is all overdue and dressed up for the next general election but it is largely positive.

  • rate this

    Comment number 321.

    The OBR have a poor record of forecasting and Osborne is in a 5 years guessing game, like all other G8 governments.

    There are many innovations that will use limited government resources in a more sensible and effective way, clearly evident in the text of Osborne's presentation.

    Do intelligent readers expect more 5 years into an unequalled global economic and financial mess ?.

  • rate this

    Comment number 320.

    @308 alan "My recollection is that a financial allowance is made for those on benefits who have access to state education and health etc and income from transfer payments from taxpayers."

    Cash benefits added to "original income" give "gross income"; deducting direct taxes gives "disposable income"; allowing for indirect taxes gives "post-tax income"; adding value of services gives "final income".

  • rate this

    Comment number 319.

    Can you see the end.

    Can you see how we've cornered ourselves.

    I know there's a lot of sand around, but I didn't realise how many heads were in it !

    'Living standards trump green agenda in Autumn Statement'.

    By golly, are our children going to love us when we're gone.

  • rate this

    Comment number 318.

    Try explaining saving money as an option to adults trying to learn money management, or schoolkids as part of citizenshop lessons.

    I'm waiting for help George and Mark....
    Even the least precocious kid realises saving sterling is for mugs
    Race to the bottom yes but not descent into hell...

  • rate this

    Comment number 317.

    Growth predictions but only for London, while the rest of the country, is still living in the 30's.

  • rate this

    Comment number 316.

    Being in control of Sterling, and printing money was the quickest, easiest and best way out of our problems. It would alow cheaper exports and increased competativness. This would lead to the rebalancing of the ecconomy, and a safer future.
    Instead we got higher import costs,( esp. energy) a pensions timebomb, no rebalancing, a housing bubble, and a recovery that will have taken ten years,

  • rate this

    Comment number 315.

    what is the difference between the
    BOE and
    two letters....ER
    (or we could have an Harry Hill fight?)
    but I'm happy happy my house is worth more, I can borrow more money etc etc etc followed by sound of financial infrastructure crashing.....
    interest rates were higher in 1948.......!!!!!!!!????

  • rate this

    Comment number 314.


    Only a dimwit, from the planet tory, does not know that when money is too cheap it just inflates house prices.

    The even dimmerwits at the BoE have painted themselves into a corner with QE and the consequent destruction of the whole concept of the proper price of money - so they will carry on - like Nelson putting the telescope to their blind eye- until our economic ship hits the rocks!

  • rate this

    Comment number 313.

    The man is a crook. And if you belive his smoke and mirrors job you deserve top be fleeced.


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