The chancellor’s autumn statement demonstrated his economic credibility has fallen even lower. Yet it also demonstrated a political reality, which we need to appreciate fast. That is that so far at least he has got away with it. It is not enough for Labour to shout that George Osborne has failed on his own measures. What matters too is the perception of why he failed and what we would do differently. What is the ‘One Nation response?
Conservative and Liberal Democrat economic plans have been ripped up further. The chancellor had two fiscal rules. The Office for Budget Responsibility has declared that debt will not be falling at the end of this parliament. His main rule, that the structural current deficit will be in surplus over a rolling five year period is apparently still on target to be met. Osborne has been helped in a number of ways with his figures. The OBR accepted that the auction of 4G mobile phone frequency licences will raise £3.5bn. Assumptions have been made about measures to reduce tax avoidance. The chancellor also decided to take the surplus interest from the Bank of England’s quantitative easing programme, a move which may be fiscally neutral over time (and is equivalent to a monetary stimulus) but means higher borrowing in future years to offset lower borrowing now: the OBR treats this as a current budget item, which helps the chancellor, but if the Office for National Statistics takes a different view the fiscal target may not be reached. The OBR has assumed the lower growth than it expected in March is largely cyclical, with favourable consequences for its structural deficit forecast.
Osborne gave a nod towards growth by measures to encourage businesses, including cutting corporation tax to 21 per cent in 2014 and increasing funding for infrastructure. Measures to pay for this included limiting welfare benefit increases to one per cent, cutting department spending limits by one per cent in 2013-4 and 2014-5, reducing pension tax relief for higher earners, and increasing the bank levy. The welfare cuts are not welcome, but if we believe we should boost capital spending without increasing the deficit (debateable) we need to find current spending from somewhere to cut. This is where politics matters.
The Coalition economic plan in 2010 was based on a desire to cut spending combined with a fear (real or imagined) that markets would punish the UK unless there was a clear commitment to reduce annual deficits. Labour’s plans were harsh but Osborne went further. There was certainly a need to demonstrate that the UK government meant business; that’s why Labour would probably have had to publish a budget statement in June 2010 if it had won the election. Osborne’s plan received adulation but the economy has refused to grow. Business and consumer confidence remain low.
The further revisions by the OBR to its forecasts show how it is best not to spend too much time debating the detailed figures. The OBR forecasts are its best guesses about what might happen in the future. Even the actual economic data is subject to change. We now know that the recession was deeper than we thought at the time but was shorter too. One current debate centres on how to increase business investment. The OBR’s forecasts do rely on a jump in investment growth but its latest report also shows that business investment is rising in line with the recovery from the 1990s recession. Moreover, it is not clear if the business sector is really carrying large amounts of net cash on its balance sheet; the figures may be distorted to some extent. We do know smaller businesses are under pressure and the Funding for Lending Scheme has yet to make a big impact.
The real austerity is yet to get fully under way yet government unpopularity at present appears limited. This is probably because most people appreciate that there are big economic problems around the world. While their faith in leaders to deliver economic growth is low, they probably believe too that government borrowed too much in the boom times, for which they still blame Labour. Labour has still to rebuild its economic credibility.
If the UK had followed Ed Balls’ advice in 2010 and focused on further stimulus our economy might now be in better shape. There was a moment, as economies struggled out of deep recessions, when further bold action was necessary. The problem is that that moment has passed and it will be harder to boost growth. A Japan scenario beckons, of years of high debt and periodic government growth plans. Labour’s answer should be a decade of investment, spread around the economy and including investing in education and skills. This would be truly a ‘One Nation’ growth plan that involved everyone in the economy.
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Stephen Beer is senior fund manager and UK strategist at the Central Finance Board of the Methodist Church, chair of Vauxhall CLP, and author of The Credibility Deficit: How to rebuild Labour’s economic reputation. He blogs at www.stephenbeer.com. This article represents his personal opinion.
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For me this article illustrates perfectly why we have so little credibility on the economy. It is entitled ‘What is the ‘One Nation’ response?’ and yet the only answer to that interesting and provocative question is a throw-away one liner in the final paragraph, the stultifyingly bland ‘Labour’s answer should be a decade of investment, spread around the economy and including investing in education and skills.’ Until we accept that spending more money is not the answer to having spent too much money (I had rather hoped that the Brown line of spending automatically equalling ‘investment’ has had its day), the public will never put their trust back in us, whatever the state of the economy under the Conservatives.
If we drop in the polls and that is a consistent drop then “he has got away with it.” What do you want, rioting on the streets? Perhaps that is yet to come. The only consistent credibility gap here is the weak and weaker essays from the Progress apologists
I don’t take too much notice of the opinion polls or results at recent by elections. They are encouraging, but no more so. People like to kick the government of the day when they get the chance, but this does not mean Labour will automatically benefit from this discontent – we can’t just continue with steady as she goes, just keep united and criticise the government for its public spending cuts demonstrating we are on the side of the angels. Should we find ourselves in government in 2015 or at least heading a coalition we will not be able to deliver on our rash promises to reverse the cuts implemented on Housing Benefit or on keeping open police and fire stations undermining our credibility and increasing voter mistrust. The truth is that the autumn statement issued by the coalition on Wednesday was pretty damn close to what a future Labour budget would have looked like – we might want to quibble about some of the detail and we may have rather different but very modest alternative priorities. The reason why Ed Balls found it hard to lay a glove on his opposite number was that he knows that the Autumn statement signalled a slowing of the cuts programme, a deferral if you like of spending cuts to further in the distance, and a modest transfer of resources to capital investment, both agendas we would have trumpeted. Effectively, the coalition is adopting Plan B (that we’ve been asking for). In order to build credibility with the people he perhaps would have been wise to have come clean and congratulated the Chancellor on his belated adoption of Plan B, but might have added that priorities of cutting tax allowances for all people rich and poor alike was a reckless move. Committing the potential, but unspecified and unpredictable windfall from the 4G license sale was again showing the chancellor crossing his fingers and hoping that it delivers the goods. When in fact it might have been better to ring fence any potential windfall for better resourcing the governments own work programme.