John Humphrys asks: what does the Autumn Statement mean for the British economy and for British politics in the next few years?
The Chancellor of the Exchequer, George Osborne, cannot have been much looking forward to standing at the despatch box of the House of Commons on Wednesday. He knew he was going to have to announce grim news and that this would hand ammunition to his pugnacious shadow, Ed Balls, allowing him to jeer “I told you so”. But as things turned out, it wasn’t entirely like that. So what does the Autumn Statement mean for the economy and for British politics in the next few years?
The reason why it looked as though the Chancellor would be in for a sticky time is not difficult to find. It’s quite simply that the economy has failed to grow at all, never mind at the rate he forecast it would when he first came into office two and a half years ago. And without growth, all Mr Osborne’s other plans are in jeopardy.
Sure enough, the Chancellor was forced to announce that the independent Office for Budget Responsibility had reduced its growth forecast for this year from the 0.8% it had predicted back in the spring to minus 0.1%. Next year the economy isn’t going to grow as fast as hoped either.
The knock-on effect is clear. Back in 2010, the Chancellor had set himself the target of seeing the overall level of government debt as a proportion of national income (GDP) falling by the time of the next election in 2015. Now he had to admit that it will start to fall only the following year, after reaching a peak of 79.9% at the time of the election. (Older readers may recall that one of Gordon Brown’s ‘golden rules’ when he was chancellor was that the debt ratio should never get above 40%. So it will be double that when voters next go to the polls.) In the light of this failure, it’s not surprising that one of the rating agencies suggests Britain may well lose its triple-A rating next year.
The Chancellor must also have feared that he would have to tell the House of Commons that his other measure of probity, the size of the government’s annual deficit, was going the wrong way too. And in fact it will be higher over the next few years than previously planned. But he was able to surprise everyone (including Mr Balls) by announcing that this year it was actually falling. Some commentators complain that he was able to make this claim only through sleight of hand – by including the estimated £3.5bn revenue from the one-off sale of the 4G spectrum in his figures. But it gave him the opportunity to say that the government was making headway, if slowly, on its principal economic task of cutting its own deficit.
Nonetheless, the faltering rate of economic growth means that the austerity the government was originally hoping to have to impose for only five years will now go on for at least eight. And that was reflected in his announcements concerning tax rises and spending cuts. The welfare budget is to be cut by a further £3.7bn by 2015/16, largely through raising most working-age benefits by only 1% a year for the next three years. At the top end of the income scale, wealthy people are to have the tax exemptions on their pension savings squeezed. And around a million more higher earners will find themselves hit by the 40% income tax rate.
Of course the Chancellor also had some ‘goodies’ to announce in order to lighten the gloom. People in work will be able to earn yet more money before having to pay any income tax at all and the threatened 3p per litre rise in fuel duty due in January has been cancelled. He also announced a switch in government spending to allow more money for capital projects involving roads and schools, and to give increased tax incentives to business, especially to stimulate investment. Corporation tax is being cut. But all this will be paid for by squeezing the day-to-day spending of government departments and local authorities. The details of these cuts are still to come.
Given the Chancellor’s admission that government debt wouldn’t fall for another four years, that austerity would carry on well into the next parliament, and that many of us were going to be hit even more than we expected in the coming years, Mr Balls had the ammunition that allowed him to say that the government’s economic credibility was now in tatters. But his performance was hesitant and the Chancellor has set some traps for Labour. In particular it will force a vote on the cuts in the real value of many welfare benefits which opinion polls suggest the public supports. If Labour votes against, the government will claim Labour is the party of the ‘idlers’; but if Labour supports the move, the government will feel vindicated. Abstention will seem weak.
To many people, though, that’s all just ‘politics’. What really matters is that the economy seems stuck in a rut with the prospect of our ever getting out of it seeming to recede beyond the horizon. Can nothing be done?
The Chancellor blamed external factors – the crisis in the eurozone and the faltering of the world economy in general – for our continuing woes. But this is only part of the story. The problem is that this recession has quite a different cause from the ones we have been used to over the last forty years or so. Previous recessions were caused by inflation getting out of control requiring governments to stamp on the brakes (by shoving interest rates up). The medicine was unpleasant but the dose didn’t usually have to be taken for long: recovery tended to come quite quickly.
This time the recession has been caused not by uncontrolled inflation but uncontrolled debt, on the part of both consumers and governments, with the knock-on effect of banks getting into very serious difficulties. Until debt is under control, no one wants to spend. Many households are also suffering from the fact that wages aren’t keeping up with inflation so they have to rein in their horns for that reason too. Figures from the Office for National Statistics this week showed that last year the average British household was spending less in real terms every week than in any of the previous fourteen years.
One bright spot is that unemployment has not risen as much as was expected. The OBR said this week it would peak at 8.3% of the workforce not 8.7% as previously thought. But even this is not unalloyed good news. Some hard-headed economists are pointing out that low interest rates are allowing what they call ‘zombie’ companies to keep ‘zombie’ workers in jobs but with plummeting productivity the result. It would be better for the economy as a whole, they argue, for zombies to be put out of business so that resources become available for more viable enterprise in the future. We risk chugging along unproductively for years if we are not careful, they say.
Some say that there is only one way out of all this and that is for the government to spend more, increasing demand in the economy and so kickstarting growth. But the government could do this only by increasing its own high levels of borrowing even further. Advocates of this approach say that although government borrowing figures are already high, the very low levels of interest on long-term government debt suggest that it could be financed and that it wouldn’t spook the markets because they understand that without growth the figures will never get any better. But whether such a policy could have anything other than a marginal effect is a moot point and the government fears that if it followed the advice it would look as though it was abandoning its whole approach.
A senior official in the Bank of England said recently that the financial crisis from which we are still reeling had done as much economic damage as a world war. The Chancellor’s basic message, that things are not going to get appreciably better for quite a long time, seems to bear this out. The political question is whether voters will take this on the chin, grumbling no doubt but feeling at some level that no government can really do much about it. Or whether they’ll lose patience with a government that says the light is still at the end of the tunnel but the tunnel is far longer than it realised. That’s the essence of the battle being fought between George Osborne and Ed Balls. It remains to be seen who will win it.
