Responses to the Autumn Statement
Six leading thinkers share their reaction to the Chancellor's Autumn Statement, delivered on 5 December 2013.
Professor Costas Lapavitsas
The autumn statement is a non-event in economic policy terms. Rather, it is a political move aiming, first, to create the impression that austerity is succeeding and, second, to undermine the success the Labour Party has had in focusing on living standards. It is unlikely to achieve either of these aims.
Austerity remains the Chancellor’s policy, and it is presumably ‘working’. But it is not. The Office for Budget Responsibility is indeed forecasting stronger performance for the economy in 2014 and 2015, yet the projected growth rates are anaemic, and will remain so to the end of the decade. British output is still below the level of 2008 and will barely catch up next year. For this reason a budget surplus is unlikely to be achieved before 2018-19 and the national debt will continue rising to 2015. The Chancellor’s policies mean that the British economy will continue drifting for years.
Still, growth will be higher in 2014-15 because people now borrow more and draw down their savings, and hence spending has risen. Expanding credit is also contributing to higher house prices, which in some parts of London already resemble a bubble. This is growth based on low interest rates and quantitative easing by the Bank of England, not on a strong recovery of production. For this reason it is unlikely significantly to improve incomes and employment. Real wages are not rising, and living standards will continue to be a problem, despite the Chancellor tinkering with the personal income tax allowance.
In this year’s Autum Statement, we have seen tiny tax giveaways which have no focus, tiny tax breaks, tiny attempts to tackle tax abuse, tiny measures to tackle the cost of living crisis. When the reality is we have continuing deficits, continuing unemployment, continuing falls in living standards, continuing increases in the wealth gap, continuing pressure on the poorest, the disabled and unemployed.
Now pensions are being deferred and a bubble is being inflated. Interest rates will increase in 2015 tipping millions into crisis with their mortgage payments, and pricing the young out of the housing market. Growth is dependent on increased consumer debt - the last thing we need. In fact, debt will be almost £200bn higher at the end of this parliament than the Chancellor forecast. There is no hint of the structural changes to banking, business, the ownership of wealth, the provision of pensions and the supply of public services that we so badly need.
It's a pretty depressing scenario. How can it be summarised:
- Austerity failed by the standards Osborne set for it
- We remain 15% or more behind where we should be on growth
- There is no sign of the benefit of growth being shared
- The foundations for another downturn post 2015 have been laid
- There remains a debt crisis
- And growth remains a mirage in the OBR's eyes - as it has always been two years hence
The BBC said Labour had a problem tackling this. I don't agree: I thought Ed Balls did OK (but no more) but what's really clear is that the time to grab the initiative is now.
We're not looking at an economic success story as Osborne says; we're looking at a crisis in the making and that's what has to be said time and time again.
According to the Chancellor, Christmas has already arrived: Thanks to his stern stewardship of the economy, this is now in full recovery, with the OBR having revised GDP growth upwards by 0.8 percentage points to 1.4% for this year, and to well over 2 % for the next five year. The UK is the fasted growing advanced economy at the moment, the double-dip recession never was, and unemployment will fall to 7% by 2015.
Austerity worked - and so we get more of it: Apart from a few unashamedly pre-election perks (free school meals until mid 2015, train fares capped at the retail price index in 2014), the message is clear: Any gains from growth will be used to lower borrowing, rather than increase public spending or lower taxes, young people will have to work until the age of 70, and some government departments will have to find room for further “efficiency” savings to the tune of £3bn.
But perhaps most importantly, ‘permanent’ austerity seems well on its way from a wanky slogan to taking real shape: In addition to the announced cap on overall welfare expenditure (with the exception of pension), an updated charter for budget responsibility will be presented to parliament in 2014. This will oblige future governments to maintain a budget surplus. According to the OBR, in a few years time government consumption will be at its lowest share in GDP since 1948. In the meanwhile, government assets are being sold off at absurd discounts to market pricing, with the UK’s 40% stake in Eurostar next up on the list, and huge sways of public sector concerns are being privatized at stealth.
As has immediately been pointed out by a number of commentators, the problem with Osborne’s Christmas tale about economic recovery is simply that it is precisely this: The current recovery rests on two shaky pillars: increased consumer spending (in the wake of the government’s “funding for lending” scheme) and an over-heating housing market. While household debt of anywhere between 100% and 200% of income seems fine with the Chancellor, the state should cap its debt/GDP ratio at 75%. This is short-term Keynesianism turned on its head. And the growth figures provided are mostly expectations, not reality. The reality is that business investment remains flat, export growth is stagnant and expected earnings have been revised downwards by the OBR. The UK economy is still performing way below its pre-crash peak, five years after the global financial crisis, and public net sector debt is higher than was expected in 2009.
Chances are that expectations will be disappointed, and soon. A return to debt-fuelled consumer-driven “growth”, coupled with permanent austerity to roll back the (welfare) state, may produce a short-lived “recovery”, but not a sustainable one. The current UK government has managed to force the costs of the biggest private sector crisis in a century almost exclusively on the poor, those who work for a living (if they can find a job), and those with the least voice in the political process. It is about time that people realised that the emperor has no clothes. As the chancellor said: “Britain’s moving again; let’s keep going."
Not so much an “autumn statement” then, more a bad day out at the student union. Good thing there aren’t people who are cold and hungry out there, worried about how they are going to get through Christmas.
Westminster is frozen in time, and that time is about 1958. You see that more clearly than usual on the self-styled “great parliamentary occasions” like today’s. All that shouting, posing, and lame rhetoric. The pathetic “jokes”. The name-calling and the bullying.
We were told that George Osborne was going to avoid triumphalism. That wasn’t a very convincing bit of pre-briefing, was it? To be fair, the nature of the House of Commons makes it hard (but not impossible) to make measured, reasonable speeches. But Osborne is rarely measured or reasonable. He glided over his failure to reduce the budget deficit as he had forecast. He ignored the fact that per capita income will not be back at 2007 levels til 2017 – the slowest recovery for over a 100 years. While GDP is finally picking up after years of stagnation, we still have miles to go to achieve meaningful economic recovery.
You didn’t hear any of that from the chancellor. But at least you could hear him. The shadow chancellor Ed Balls was effectively shouted down by a sustained and well organised piece of heckling from the government benches.
Now, Balls is a grown-up, and he must have known such an attack was coming. But you can’t shout your way out of it. Hard as it is, you have to speak more quietly and trust the Speaker to offer you some protection. Using the word “denial” was unwise, given that this is the principal line of attack used on him by his opponents.
What we got was a red-faced and rather hoarse shadow chancellor trying to make his case against the braying and the bellowing opposite. A pretty hopeless spectacle, and a waste of everybody’s time.
Viewers (and voters) will not be as impressed by (or interested in) all this as the media are. They will just see plump and suited figures shouting at each other, with Tories ridiculing the idea that people are struggling to make ends meet. There is a bleak and cynical assumption being made that there are enough votes for the Conservatives in keeping their own core voters happy, while the struggling poor will be too disillusioned and dispirited to vote themselves.
I think this is a serious miscalculation. Duncan Weldon at the TUC (http://touchstoneblog.org.uk/2013/12/new-forecasts-the-good-the-bad-the-frankly-terrible) unearthed the key statement in the Office for Budget Responsibility’s report – “We do not expect real take-home consumption wages to reach their pre-crisis peak until late 2015”. So pay will continue to rise only slowly, if at all. The voters will not be fooled. There is a living standards crisis. It’s not just a soundbite, it’s real. And the government has no answer to it.
That is the reality that this chancellor cannot face and which his charming colleagues cannot shout down. Even if much of the media doesn’t get this – and I have written about this phenomenon here before http://classonline.org.uk/blog/item/Class-politics-and-the-media-breaking-through-the-barriers – people do. Yes, Labour needs to set out a clearer alternative, preferably when there is a bit less shouting going on. But don’t let the smug and complacent chancellor mislead you. The voters have had enough of this government, they do not believe that things are going as well as the government tells them they are, and they will take the first chance they have to get rid of them in May 2015. It was a cold autumn for the government, and winter is going to be worse. That will be the story once the shouting has died down.
"The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad."
Jeremy Warner, Daily Telegraph, 11 September, 2013.
The Chancellor echoed the warning in David Cameron’s Mansion House speech and the OBR’s prediction that austerity is here to stay if we are to have "a state we can afford". “We need to do more with less” as the Prime Minister argued. “Not just now, but permanently."
At the same time, he offered a justification for further cuts in the corporation tax rate, down to 20%.
We must not be fooled. Slashing government spending and cutting corporation tax revenues does not cut the deficit, nor does it bring down total outstanding public debt. On the contrary, total government debt has risen over the year from 72% of GDP in 2012 to 75.4% in October 2013(ONS).
Despite economists’ expectations that the government deficit – the difference between expenditure and income - would fall to £7.25bn in October, borrowing fell only marginally to £8.078bn, compared to £8.24bn in October 2012. Much to the consternation of Conservatives, absolute levels of the deficit are still large – despite savage cuts to welfare, the NHS and defence - with this year's deficit likely to be more than 6.5% of GDP.
No the Coalition’s goal is to slash the state – not the deficit. If Ministers really wanted to cut the deficit, they would raise incomes, and create more well-paid jobs. Only employment can generate the government revenues needed to balance the budget – through the effect of the multiplier on income and other indirect taxes.
All else is smoke and mirrors: cover for “making inroads into the state”.
Yesterday the Office for Budget Responsibility released their new forecasts for the UK economy. The Chancellor was keen to hail the good news – ‘growth is returning’, ‘the plan is working’, ‘borrowing is coming down’ – but what the Chancellor did not choose to dwell on is perhaps more revealing.
Whilst growth in the overall economy (and that growth is even more dependent on household spending than previously) has been revised up the pace of average earnings growth has been revised down. To summarise the new forecasts in a sentence – people are now expected to get paid less but spend more.
Growth over the last year has been associated with a falling savings (bank deposits are being run down at a record rate) and increased consumer borrowing. In macroeconomic terms the “household savings ratio” (the percentage of their income that all households in aggregate save) has been falling.
Whilst any growth is obviously better than no growth, growth that depends on households raiding their piggy banks and turning to lenders is not a sustainable way to run an economy.
It wasn’t supposed to be like this. The Government originally wanted to rebalance the economy – to grow exports and business investment and make us less reliant on consumer spending and debt. This is a worthy aim but not something that be achieved, as the government seemed to think, by a combination of slashing corporation tax and austerity.
What we needed to hear yesterday was a plan to grow real incomes for working people and how to get investment flowing in the economy again, a long term plan to make us a higher wage, higher productivity economy. Sadly we didn’t get any of that – just more of the same from a Chancellor who couldn’t even bring himself to say the word ‘rebalancing’ in yesterday’s statement.