The big "ifs" of the Emergency Budget
The June 2010 budget was unusual because it had a clear narrative: it said our aim is X and therefore we are doing A, B C. Previous budgets have not always been so clear.
In fact, the Osborne-Alexander budget has three clear narratives:
- That they will aggressively eradicate the structural deficit, piling 32bn of cuts and 8bn of tax rises on top of the 73bn planned by Alistair Darling.
- That they will avoid tanking the economy by encouraging a rapid switch from public-sector led growth to private sector, investment and export-led growth.
- That they will avoid piling the pain onto the poorest.
The problems with this narrative are equally clear:
- The scale of the cuts required, lumped onto departmental spending, means there is no guarantee they can be achieved. If you flick through the data on UK public spending, not even in the years of Denis Healey and Geoffrey Howe did departmental spending fall. It may have been eroded by 15% inflation - but it always rose in nominal terms. We have no culture and no experience of slash and burn in living memory.
- There is no guarantee that the UK can make this switch. If you look at the table "Gross Domestic Product and its Components" in this OBR document, released yesterday, you will find some pretty heroic assumptions. Exports rise 90bn, fixed investment rises 60bn, and the trade deficit falls from 44bn to just 9bn - all over a period of five years. GDP grows by around 150bn over that period, while government consumption actually falls by 30bn.
- Finally it is not clear how hard the poor will be hit until the service cuts take place. The graph the government produced to show the Emergency Budget was "progressive" does not show precisely that. It shows the top 10% of earners (over 50k) lose about 2% of their income - but mainly because of income tax changes introduced by Labour. For the bottom 10%, unable to gain from tax changes, the VAT hike dents their real income by about 1%.
The curve looks less like a ski jump and more like a banana: it is much flatter than the income tax curve - where the richest lose 50% of their income and the poorest (under 7.5k) none.
These are not minor problems. The gap between intent and effective action is large when it comes to transformations of this kind. We are used to politicians being able to take effective action: on banking they eventually muddled through and cauterised the crisis.
But not all problems are solvable through technocratic means and strong narratives. We've banned dangerous dogs apparently, but my local park is teeming with them and their be-hoodied owners. We've been nearly ten years trying to solve Afghanistan. Or, to use a more precise parallel - we've tried and failed to build and NHS-wide IT system.
When I reported on the launch of the NHS IT project the veteran investigative reporter Tony Collins told me. "If somebody walked into the Treasury and said 'let's build a bridge from Britain to America' they would be laughed out of the building. But if you walk in and say lets computerise the whole NHS onto one system they simply ask: 'when can you start?'." And it came to pass that building the NHS IT system turned into a major and intractable disaster wasting billions as predicted by Mr Collins and his ilk, who had seen it all before. We are seeing another example of the limits of technocracy and engineering skill played out in the Gulf of Mexico.
What George Osborne did yesterday has for now sealed Britain off from the risk of a sovereign debt crisis. But the other risks are pretty clear. The fiscal tightening creates a hole in demand the size of 6.8% of GDP by 2014. Yet the OBR predicts growth of 2.7% by then. To travel at 2.7 km per hour into a headwind of 6.8 km per hour you are really motoring at a notional 9.5 kmh. In other words, we are expecting a growth effect from this budget that takes us into the same league as Brazil or China. That is a big ask.
But it doesn't just rely on investment flowing into UK manufacturing and services. It needs the market for these goods and services to be expanded. Mr Osborne was not wrong to appeal to the G20, which has urged trade surplus countries to start consuming so that those with budget deficits can produce and export their way out of crisis. But this again is easier said than done. The whole story of the decline of UK industry during the Labour years was of expensively attracted investment - the LG factory in Scotland's Silicon Glen springs to mind - that failed because the market and the price was never right. And so far, the fall of sterling has only partially stimulated exports: companies have been content to take profits rather than expand production.
If the economic risk is of a double dip recession, further undermining sterling and the FTSE without any real uptick in export performance - the political risk is also obvious.
The crunch day will be 22 October, when Departments finally find out how much they are to lose. At this point the Liberal Democrats will have to face down councillors and party activists. The current shape of the trade-off has been that the Libdems abandon key principles expressed before the election (2.5:1 ratio of cuts to tax, opposition to VAT etc) in return for serious constitutional reform and the Great Repeal Bill. Once schools, universities, libraries, day centres and the like start closing, and tens of thousands of public servants get their P45s - that deal will be weighed in the balance again.