The budget discussion concentrates on the recent growth reassessment by the OBR. Bad enough as that is, a fuller picture emerges if one compares their recent estimates with its last pre-Brexit report from autumn 2015.
The Institut der deutschen Wirtschaft Koeln has done so and compared the OBR’s growth estimates for 2016-2020 at those two points in time:
| Cumulative growth 2016-2020 (%): | 2015 report | 2017 report | shortfall |
| GDP | 12.6 | 7.6 | -5.0 |
| Private consumption | 12.8 | 7.7 | -5.1 |
| Business investment | 39.2 | 9.4 | -29.8 |
What does this mean?
The GDP-shortfall in 2020 amounts to GBP 140 Billion, or roughly GBP 5,000 per household per year.
The Private consumption-shortfall amounts to around GBP 70 Billion, or GBP 2,500 per household per year.
Business investment was around GBP 175 Billion 2015, the growth-shortfall between both reports represents more than GBP 50 Billion. Under the assumption that this investment volume would have had 50% British labour content, it represents 50,000 man/woman-years of employment at a total cost of GBP 50,000 p.p./p.a. Applying the UK economy’s average capital intensity (total net capital stock/total workforce) of around GBP 140,000 per job, the business investment shortfall might be associated with 35,000 permanent positions not created.
Let me address some of the most likely attacks on this analysis from Brexiters upfront:
Firstly, we can quite confidently exclude excessive optimism by the OBR in 2015. We are seeing the most robust rebound of the global economy in all regions since over a decade. In 2015, the UK was still leading this trend, and, in the absence of all referendum-related disturbance, there would have been no logical reason why the UK should not have fully participated in this global upturn.
Secondly, the OBR’s latest numbers for 2016-2020 are 40% based on actuals, and just 60% forecasted. For this report to be overly pessimistic, rather massive positive surprises would have to happen 2018-20, the very years of EU-trade-deal negotiation and transition-phase commencement (in the positive deal-scenario).
* Arnold Kiel is a self-employed Management Consultant, father of two sons in British education, and very concerned about their future in this Europe
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36 Comments
Arnold,
You stated ” For this report to be overly pessimistic, rather massive positive surprises would have to happen 2018-20, the very years of EU-trade-deal negotiation and transition-phase commencement (in the positive deal-scenario).” of cause the reverse may well be true “For this report to be overly optimistic, rather massive negative surprises would have to happen 2018-20, the very years of EU-trade-deal negotiation and transition-phase commencement (in the negative deal-scenario).”
Now given the way talks are going a negative outcome looks much more possible than a positive one, in which case the OBR forecast may be very optimistic. Still we are talking facts and experts and most brave Brexiteers do neither.
The OBR. George Osborne’s invention mostly designed to discredit the previous government, push a right wing program of cuts and to promote the pitiful results as synonymous with ” realism”.
Glenn, please don’t credit only the Conservatives with recognising the harsh reality that existed in 2010. The Liberal Democrats and large parts of the Labour Party (Alisdair Darling and Liam Byrne) recognised it too. Clearly Labour in opposition saw advantage in denialism, but that should be seen for the shameful cynicism that it is.
@ Joe Otten,
The “harsh reality” in 2010 was that the private sector had stopped borrowing and was trying to replenish its balance sheet by saving. The balance of payments was negative too. So the overseas sector was saving – as it nearly always is. So if two sectors of the economy are saving the third sector ie Government has to be borrowing. Its just simple arithmetic if you properly understand sectoral balance theory.
To express the same thing slightly differently: If the UK as whole is running a trade deficit, someone in the UK has to do the borrowing to support it. If the private sector is borrowing more the public sector is borrowing less and vice versa.
@ Arnold. I’m not sure about “the Institut der deutschen Wirtschaft Koeln”, or the German Business Institute, but if they are anything like our OBR and official Treasury forecasters, you can safely disregard any predictions they might make. The OBR are hopeless!
You’d do better by reading Old Moore’s Almanack !
People don’t like being wrong. If we are trying to change the minds of this who voted Leave we won’t do it by talking at them with figures and statistics even though we find those interesting and confirmation that we were right.
Instead we have to give them a way out, a way of saving face, and for me that would be that they have been lied to for 40 years by the wealthy who own newspapers and more recently by the Leave campaign, also mostly made up of wealthy members. The result is the rich will get richer by ignoring workers’ rights and by hiding their wealth in offshore accounts while the rest of us pay taxes and get poorer. We should be outraged that this con trick has been perpetrated on the British public by a Tory party which will do anything for power.
Peter, if government borrowing is determined by arithmetic, how can anyone object to fiscal policy because every possible fiscal policy is a fantasy.
The arithmetic is fine, but you have the causality wrong. Fiscal policy is a policy lever (though not a perfect one), the other two will change in consequence.
This German institute was just comparing OBR-numbers, and did not add any own estimates. To discredit the resulting shocking loss of wealth one must not only reject the OBR’s competence, but also be convinced that they were wrong differently on the same question at two points in time.
I think the point Peter Martin was making is that OBR are not known for the accuracy of their statements. I’m not sure if they have ever got one right since they came into existence.
@ Joe Otten,
That’s a good point. In many ways your comment goes to the root of the difference between neo-classicals, neoliberals, neo-Keynesian and those, like myself, of a more conventional Keynesian persuasion.
The government’s deficit has to be equal to everyone else’s surplus. That’s self evident. If we divide ‘everyone else’ according to where they live and fiddle around with the signs and terminology a little we get:
Government Deficit = Savings of the Private Sector + Current Account Deficit (Trade)
This equation doesn’t tell us anything about inflation or the state of unemployment. But it does give us a clue as to the possibilities.
1) A neoclassical or neoliberal economist would say that if Government directly controls its deficit, the current acccount deficit will therefore also fall and/or savings will fall as investors have more confidence in the economy.
2) A neo-Keynesian economist would say that by reducing interest rates we can discourage saving and encourage borrowing. That should stimulate the economy and reduce the Govt’s deficit at the same time.
3) An orthodox Keynesian would say that lowering the exchange rate will reduce the current account deficit which will reduce the Govt’s deficit. The Govt’s deficit may well not be considered a bad thing in itself providing that it can easily fund it without having to raise interest rates too high and that inflation isn’t too high.
So we’ve see George Osborne try the first and fail spectacularly. We’ve seen all Govts resort to the second ie lowering interest rates to keep the economy going and their deficits low. That works up to a point but eventually interest rates get so close to zero that the end of the line is reached. Then the question of asset price bubbles in the property market has to be resolved.
So that leaves the third option. There isn’t a fourth. So in future we’ll have to go with that.
@ Arnold,
The OBR are always forecasting a return to surplus.
Like this:
“the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in
2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent
of GDP in 2015-16.”
http://budgetresponsibility.org.uk/docs/dlm_uploads/junebudget_annexc.pdf
It’s nonsense to think that the UK can ever have a budget surplus while its trade is in deficit unless the level of private sector borrowing is dangerously high. See my comment to Joe Otten above.
And if the UK allows the currency to float it will always be bought up by the big net exporters, like Germany, who need the pound to be high so they can export stuff to us.
That’s just the way it is. It’s not rocket science. Why the OBR don’t see it is quite beyond me.
@ Joe Otten
When our manifesto was written for the 2010 general election we promised an economic stimulus, jobs for everyone who needed one and not dealing with the deficit until economic growth was secure. We presented the Labour Party as wanting to spend more than us. So assuming we were being honest there was no agreement on the cuts needed after the general election. As soon as the general election was over we ditched our previous popular economic policy to support the Conservative one, which according to News reports at the time took us into a double dip recession (upgraded afterwards). You sound as if you think that the Coalitions economic policy of 2010-12 that almost caused another recession was the correct one! We as a party need to recognise it was not the correct one and even when we had modified it we continued as a government to say “Nothing has changed” just like Theresa May did in 2017.
@ Arnold Kiel
The News report that I saw about the new OBR forecasts put the blame for reduced economic growth on stagnating productivity. If the forecast for business investment is correct then the government needs to spend to meet the shortfall. We should all be aware that if economic growth falls to 1% then unemployment is likely to increase as it has in the past at this economic growth level.
It is time that as Liberals we recognised that we have to ensure everyone who wants a job has one even if this increases inflation and the national debt.
I am no economist (and for the record voted Remain and would prefer to stay in the EU but am unconvinced that the sky will fall if we don’t) so I might be completely missing the point here, but how does this change in the OBR’s predictions compare with its previous record?
For example, in November 2011 the OBR said, “Economy expected to be 3½% smaller by 2016 than thought in March” (http://budgetresponsibility.org.uk/docs/dlm_uploads/EFO-briefing-Nov-2011.pdf)
Does this mean that 6 months of Coalition Government caused a shortfall in predicted GDP of 3.5% compared to 5% during 2 years of Brexit turmoil? If the latter is disastrous, what does that say about the former?
The UK economy will weaken as the jobs boom ends and inflation hits household incomes, according to a major global think tank.
This is another blow for the UK, after sharp cuts to GDP forecasts were unveiled in the Budget last week.
Revealing its outlook for 2019 for the first time, the Organisation for Economic Co-operation and Development (OECD) said it expected UK growth to worsen over the next two years. Its view is even more bleak than that of the Office for Budget Responsibility, presented last week.
The OECD predicts that the UK economy will grow by 1.1pc in 2019, compared to 1.3pc in the OBR’s view.
http://www.telegraph.co.uk/business/2017/11/28/oecd-unveils-gloomy-outlook-uk-economy/
So OCED say OBR is optimistic.
Peter we have moved past all the economic models you have mentioned. None of them take into account the magic money tree of QE. No doubt models will be drawn up to explain that, but I’m afraid the key to any economic plan is confidence, whether it be based on the gold standard or the value of pebbles or bits on computers and not theoretical models.
Frankie,
“None of them take into account the magic money tree of QE”
Look, just forget about “magic money trees”. Government issues either bonds or cash to fund its spending. Cash is an IOU with no interest payments. Bonds are IOUs with a small amount of interest. It’s all taken care of in the sectoral balances if you do it the right way.
Peter,
Explain to me why QE isn’t a magic money tree and I will forget about the concept. Remember 23% of our national debt is owned by the Bank of England on the back of QE and if that isn’t a magic money tree what is. You make money and buy your own debt, seems magic to me, what a pity we can’t do that in our own lives.
Fifty billion a sad day for the brave Brexiteers, no 350 million a week for the NHS. Apparently they don’t need us more than we need them, if only someone had told them, O wait they were. This Brexit is getting more expensive by the day, still we still have “taking back control init” they can never take that off us.
@ frankie,
All you need to remember is that the BoE is owned by the Treasury secretary and is effectively a part of it. So the BoE is the part that creates pounds -The Treasury is the part that creates gilts. The former isn’t, for historical reasons connected to the gold standard, counted as debt. The latter is counted as debt. They are both liabilities of government so both should be. The 23% should be counted too but it isn’t. Everything makes much more sense when you do this.
So why should Govt issue gilts, which pay out interest, when it only needs to issue pounds which don’t? It obviously doesn’t need to pay out interest. The answer it usually chooses to pay it out as part of its monetary policy. As a part of setting interest rates in the economy. Shorter term interest rates are set by the decision of a committee. They’ve just pushed them back up to 0.5%. Longer term rates are adjusted by the process of buying and selling its own bonds. If Govt wants to reduce longer term rates it (or the BoE arm of the Treasury) will buy up its own bonds. ie QE.
If Government wanted to raise them it (the BoE) will sell them back into the market to depress their price and hence the yield and effective interest rate would rise.
Frankie,
One off pay over a few years. Obviously, they need the money more than they need unity. This is the sound of nails finally going into the Remain coffin. Most of these articles are arguing against Hard Brexit and this is a move away from Hard Brexit The Norway solution is the obvious way to go. It was a close referendum that ultimately requires compromise.
Ah Glenn Norway embrace the four freedoms , pay into the budget and pass most of EU laws into their laws, it’s remain without influence. Still as long as you can say we left without really leaving all is good.
The OBR is indeed not alone in its assessment that the prospects of all economic indicators have deteriorated massively since the referendum: GDP, consumption, and business investment.
The debt-question does not change that: consumers have pretty much maxed out on credit, many corporations have the cash, but rather buy back shares or invest elsewhere, and Government wants to cut the deficit. Indeed, Government could borrow and “invest” more, but, unlike business investment which are immediately cash-generative, infrastructure, education, or healthcare produce only delayed and indirect stimuli for incremental commercial activity.
@ Arnold,
You are right. There’s no shortage of influential “think tanks” working with the same kinds of flawed models as the OBR. So if they’ve led the OBR to making the wrong forecasts, we can’t expect any different for anyone else.
Brexit isn’t a magic remedy for the UK economy. We are just as capable as stuffing it up as ever we were if we don’t get it right. That’s why forecasts are quite meaningless. If we do it right we’ll be OK. If we don’t, we won’t!
The history of incompetent government and ruinous fiscal policy is seen in the value of Sterling, Zimbabwe an extreme example of what happens to a currency when you plug into the magic money tree… so careful what you wish for.
Turning the UK into a Western version of Singapore – what many Brexiteers hope for – would benefit about half the country and have the other half enraged so how will they get the political majority to do it? Sleigh of hand most likely!
Frankie.
Norway still aren’t in the EU and of course the position makes further breaks easier over time. Pass most, but not all EU laws. pay some into and so on. Plus the UK influence was never that big or that positive in the first place. I’ve always thought the four freedoms was a bit of red herring as the actual problem was that UK during/after Blair was basically trying to be a mini America complete with an invented mythology and ridiculous pretentions to global power. That will peter of naturally in a country somewhat more focused on domestic politics. The point is that it makes us seem less global. I’m an unapologetic small islander and want my progressive politicians off the world stage so they can focus on the boring domestic stuff rather than posturing about things they have zero control over in countries that don’t even know who they are and care even less about what they have to say. It’s much easier to change a country than it is to change the world. I like Norway a lot. Great place. I
@ William Fowler,
UK fiscal policy hasn’t been “ruinous”. Even the present Govt agrees that we need 2% inflation to make the system work.
We used to have an economy where the price of a loaf of bread was 5p (or 1 shilling) and the wage of a typical worker was also 5p per hour. Now we have the price of a loaf at £1 but even those on minimum wage at paid something like £7 ph.
So which is preferable?
I do not think the relationship between the price of a loaf of bread and the hourly pay rate has anything to do with government policy. There was a massive improvement in the standard of living without any inflation. In the 1970s we had “stagflation” when prices and wages rocketed but living standards did not. People put forward these views because they are fashionable, not because they are true. There is a difference.
Peter Martin 29th Nov ’17 – 11:27am………..We used to have an economy where the price of a loaf of bread was 5p (or 1 shilling) and the wage of a typical worker was also 5p per hour. Now we have the price of a loaf at £1 but even those on minimum wage at paid something like £7 ph. So which is preferable?
Which year was this?
In 1966 a loaf of bread was around 6p but the average weekly wage £15.50…That equates to an hourly rate of almost 40p…And, considering that an average house price was around £3,500 (just over 4 times the yearly salary) as opposed to £200,000 (which is almost 8 times the average salary) I’d say, “1966 every time”…
@nvelope2003,
I think we can agree that inflation was too high in the 70’s. The four fold increase in the price of oil was a factor but there were others.
Govt requires the BoE to engineer 2% inflation in the economy. That’s a target and not an upper limit BTW. Whether that’s the right figure has be be debatable, but the intention is to generate some growth in the economy by introducing a small element of use-it-or-lose-it to held currency. Savings per se aren’t good for the economy. Just collecting a fixed rate of interest from the banks isn’t actually creating anything. They have to be converted into investments. See paradox of thrift link below.
So both the price of bread and the average wage rate has everything to do with govt policy.
https://en.wikipedia.org/wiki/Paradox_of_thrift
@ Expats,
Yes I take your point re 1966. Things weren’t too bad then. Maybe I should have gone back a few more years. There was full employment and manageable levels of inflation with everyone who wanted to work could get one providing they were physically capable.
GDP was only a third of its current level though. Obviously the argument that we should concentrate only on the size of the cake -rather than how it is shared out doesn’t work well for everyone. However, my point remains that we can’t directly compare 1966 pounds with 2017 pounds without looking at what we can buy in the present day economy by comparison.
Fascinating stuff from 1966 to 2010, Singapore (half the counry? who outside a 5 mile circle around trafalgar square?) and Norway (great idea: add 50% land, kick out 90% of the people, and then just catch fish and pump oil).
Is it symptomatic that nobody is interested in the life of ordinary Britons 2020?
Before QE wrecked the market in such things, savings allowed banks and Building Societies to lend money so there is/was some point to them, and much better for people to be dependent on themselves rather than the State when things go wrong.
Peter Martin 29th Nov ’17 – 1:26pm…………………@ Expats, Yes I take your point re 1966. Things weren’t too bad then. Maybe I should have gone back a few more years. There was full employment and manageable levels of inflation with everyone who wanted to work could get one providing they were physically capable. However, my point remains that we can’t directly compare 1966 pounds with 2017 pounds without looking at what we can buy in the present day economy by comparison…………..
Martin, that was my point; back then we could afford things… Post war council house building meant that there were far more ‘affordable’ homes; food prices were comparatively lower, train/bus fares were lower; energy costs were lower..In fact I’m at a loss to remember,apart from alcohol, what was, comparatively, more expensive…
The ‘Cathy Come Home’ programme made us all aware of those at the bottom but there were far, far, fewer then than now… As you say there was work available and even those in the bottom tier could afford basic homes, heating and food…We may have become a more wealthy country (GDP) but we are less caring and, when working wages are not enough to provide even the basics, we have little to be proud of as a society…In those days we acknowledged the damage done by cigarette advertising on TV, and acted accordingly…Today usury and gambling are promoted??????????…
Corbyn was accused of trying to take us back 50 years…Well, he confounded his critics by promising to do just that…Affordable? Who knows; but ‘more of the same’ isn’t taking us anywhere except down…I just wish our party would stop being all things to everyone (apart from Brexit) and become the radical voice that I remember from all those years ago..
The projected 30% shortfall in business investment is shocking, especially as the ONS draws on the government’s own figures to produce its estimates. But why should it be such a large shortfall?
The oft-quoted truism is that business hates uncertainty. Well, yes, but I think there’s more to it that that.
Since the invention of the steam engine the UK has had only two (perhaps two & a half) ‘national business models’. The first, which lasted from the industrial revolution to the end of WW2, was that we in the UK made stuff and exported it to the colonies in exchange for raw materials – the export of which enabled them to buy our manufactured goods.
This was the great era of ‘Free Trade’ meaning we made the rules and the colonies obeyed them. That’s how empires work. It was a scheme that worked well but with a subtle flaw that only showed up in the longer term – it was all too easy for UK firms to pick the low-hanging fruit of protected empire markets and not keep up with the best of international competition.
The collapse of empire and its protected markets after WW2 precipitated a crisis and, after joining the Common Market, a new business plan. For the last few decades the UK has relied largely on inward investment from overseas sold to companies as their bridgehead into Europe.
That’s been fairly successful and, as a direct result, we now have an economy that’s intimately interwoven with those of our European neighbours. I don’t think Brexiteers understand that or what would happen in a divorce, but firms do – hence the drying of investment.
See, for example, Channel 4 News’ piece last night on Ford’s European operations which was clearly choreographed by Ford itself to make a point. As Steven Armstrong, their European boss says, “I am concerned, I am very worried. It’s important that we see a future in the UK that’s competitive. A ‘No Deal’ would be a disaster we believe, not only for my business but for business in general.” Ford calculate that crashing out would cost them $1 billion per annum in tariffs. And that’s not counting the cost of ripping complex supply chains apart.
https://www.channel4.com/news/hard-brexit-threat-to-british-motor-industry
@ William Fowler
I don’t know when your golden age of self-dependency was? It can’t have been after 1833 when people lived in fear of the workhouse. It can’t have been after 1908 when National Insurance and state pensions were introduced. It can’t have been after 1945 when the welfare state was fully developed so the state ensured there were enough jobs for everyone and a safety net for the short periods of time a person was between jobs. It even can’t have been between 1600 and 1833 when the Elizabethan Poor laws provided assistance for those without work. Perhaps you mean between the 1530s and 1600 when the state didn’t do anything for the poor and the church no longer did anything either.
@ Gordon
You are correct that today our economy is tried into the EU zone. I suppose this started in the 1980’s and took off in the 1990’s. However you are wrong about the past. Britain exported to the world in the nineteenth century, but as the twentieth century approached faced stiff competition especially from Germany. It was then that there was talk of forgetting about free trade and having Imperial preference tariffs, which came in the 1930’s as protection grew all around the world. After the Second World War West Germany and Japan and to some extent Italy had newer machinery than us and started to win the battle of foreign trade. Then Thatcher came into power and set the economic conditions for our manufacturing base to decline even faster, so we had to reply on foreign investment as your “bridgehead into Europe” where conditions of employment were worse and it was a lot easier to fire people in the UK than the rest of the EU.
Michael BG
You mistake my meaning; as far as the history goes I think we are on the same page. In the early nineteenth century as the first, and for a time, only industrial power we did indeed export to the world but, as competitors emerged and things got tougher, the empire continued to provide informally protected markets (‘sheltered’ might have been a better word). Hence in large part the ‘Scramble for Africa’ from 1881; increasing competition was also an issue for France & Germany.
Nevertheless, our nineteenth century ‘national business plan’ staggered on, becoming less and less fit for purpose until it finally collapsed just after WW2. When the political and business establishment belatedly accepted it was finished we started trying to join the Common Market.
Joining has worked – to a point. But the success stories are mainly foreign-owned like ALL the volume car makers while domestic-owned successes are uncomfortably rare. And that points to a deeper problem than that some continentals have newer machinery. However, it’s NOT the one Thatcher & Co. settled on, namely that what we need is to marketise and deregulate everything.
All this suggests that (a) we urgently need to discover a new ‘national business plan’, and (b) that there is a political open goal waiting for the first political party to propose one. The risk is that that it will be a snake oil plan unless Liberals come up with a convincing one – something the Lib Dems, as currently constituted, are quite unable to do.
The fact is the Tories simply don’t understand how the economy works and Brexit, their current best idea, is definitely in the ‘snake oil’ category and would be an unmitigated disaster as the Channel 4 News item I linked earlier shows. My sense is that business, even big business like Ford, is only just beginning to comprehend how utterly incompetent the Tories are and what an epic disaster is in the making. I would love to be a fly on the wall as business leaders meet senior Tories over the next few months and explain the facts of economic life!
@ Gordon
I don’t think we are on the same page with our history. The British Empire did not really provide markets for British goods. This might be because of the Rebellion of the American colonies. However the main problem was the size of population in the colonies. Not even India provided a market. However the Empire provided resources. This was the main reason countries wanted colonies. There was no large market for European goods in most of Africa. The ‘Scramble for Africa’ did not provide markets for European goods. As I stated it was only with the coming of the twentieth century that some in Britain looked to the colonies as markets, such as Canada and Australia. Imperial Preference only last between 1932 and 1939.
I wonder if you were watching the News between 1973 and 1983. There was no large scale investment in the UK by foreign companies until after 1983 when following the Thatcher Government created recession the economy picked up and the number of factory closures reported on the News at Ten declined.
It seems the common problem for most of the time since 1945 was a lack of investment by British businesses in the UK and this continues today.
The economic hardship of coastal and other towns highlighted recently will not be much effected by us regaining our sovereignty and restricting immigration.