Today we witnessed a government and a chancellor with a lack of wiggle room writhing around to the best of their ability. George Osborne was on surprisingly good form compared to the blundered budget, and Ed Balls was insipid in a response that seemed to ignore the forecasts and measures just outlined before him. Nevertheless, even with the chancellor on song and his opposite number off-key, it will be difficult for the coalition to use the statement as much of a turning point in the narrative of this government.
Whilst both parties would like the press and the public to be wowed by the infrastructure projects and minor tax cuts announced today, in reality the coverage will focus in on the extension of austerity, further cuts to welfare and the missing of key government targets. They are right to do so; extending the timeline to eliminate the deficit is fiscally prudent but also an admission that the coalition has failed in its central task of fixing the public finances in five years. Low to no growth – accepting the mitigating factor of the eurozone crisis – is now the coalition’s burden, and has forced onto them difficult choices such as the extra cuts to benefits announced today.
The measures in the statement aimed at boosting the economy are mostly welcome: few would deny that the UK’s creaking infrastructure needs an overhaul, or that a productive use of the state is to invest in projects the private sector would likely avoid. Osborne and the coalition deserve credit for (mostly) avoiding populist boondoggles and instead ploughing leftover money into capital spending. The problem is that the projects announced do not add up to a national infrastructure plan, the measures appear cobbled together and the structure or working of the Business Bank remains as opaque as ever.
For the Lib Dems – in government and outside – the autumn statement must rank as a disappointment. Victory can be claimed on a further personal allowance increase, but David Cameron clearly squelched any hopes of any new taxes on property and wealth – Nick Clegg was reduced to shaking his head as Osborne drove this home in his speech. Instead pensions have been raided for additional revenue, a tactic George Osborne’s predecessor but one in 11 Downing Street liberally employed. The use of the small bit of slack in the public finances to scrap a fuel duty increase suggests the Lib Dems were overridden by a Tory desire to appease some of its core constituencies.
Politically, the real long-term impact of this statement will not be felt from any of today’s measures. Revenue and fiscally neutral autumn statements are not the stuff political folklore is made of. Rather it is in the announcement that austerity will have to continue until 2018. This confirms that the original strategy of both Coalition partners – balance the budget as quickly as possible and then offer more voter-friendly policies before 2015 – is now impossible. The electorate is unlikely to go to the polls in 2015 desperate to vote for three more years of guaranteed austerity, whether tempered by the Liberal Democrats or not.
* Daniel Wright is a Senior Associate at Cicero Group
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13 Comments
Over at Mainly Macro http://mainlymacro.blogspot.co.uk/2012/12/some-thoughts-on-autumn-statement.html Professor Wren-Lewis drafted a speech for the FT that he wished the Chancellor had made. It is certainly the statement which I wish a Liberal Democrat Chancellor could have made had we not allowed pessimism to dominate our thinking. We have the capacity, we have the potential to increase aggregate demand, we just don’t have visionary leadership. Here’s the Professor’s speech:
Mr. Speaker
The OBR, using tried and tested methods, tell me that there is very little spare capacity. Apparently the UK has suffered an unprecedented decade of low productivity growth, for no obvious reason. We therefore need yet more fiscal consolidation.
But there is another possibility. Firms may be underreporting their capacity. Inflation is not falling because of commodity price shocks and rigidities when inflation is low.
I have no idea which explanation is correct. But a good Chancellor considers the consequences of mistakes they might make. I failed to do that in 2010, and I will not do so again.
The danger in following the OBR’s path is self-fulfilling pessimism. By tightening policy today, demand falls, and supply appears to fall with it. It may be years before we realise that the economy could have safely produced much more, and we will never get that output back.
That is why I am announcing today that there will be no further austerity. Instead, to test what the economy can sustain, I’ve agreed a £25 billion increase in public investment, funded by a combination of borrowing and higher taxes. Furthermore, I have told the Bank of England for the next three years to replace their current target with a nominal earnings growth target of 4%, and I’ve sanctioned unlimited Quantitative Easing in order to achieve it. I have asked the Treasury Select Committee to investigate possible longer term changes to MPC objectives, like a nominal GDP target.
Perhaps my policy will fail to produce extra growth and just give us higher inflation. But I know the MPC will act quickly to counteract this. At least I would have tried. The far greater danger is that by continuing down my previous course each UK citizen would end up losing thousands of pounds forever.
I commend this statement to the House.
I suspect that the backlash seen so far against lib dem vote is nothing to what will happen after April when the “strivers” realise just how their council tax, housing benefits and working benefits start to change. I hope this party is bracing itself for that.
DA sitting alongside Cameron and Osborne chuckling away while they do their childish double act does the lib dems no service at all. Looks like a first year kid being allowed to play alongside the 6th formers and that’s a shame. For once at least Nick Clegg showed a little sense by not looking like he was enjoying the event at all.
Collective cabinet responsibility is all very well for a one party government but really, it isnt helping here.
I am a Liberal supporter (except your EU policy) anyways I was sad to see its once again the LibDem spokes person D.Alexander out their on radio and TV defending a Tories budget while the man responsible G.Osbourne hides away. Your being used like Muppets don’t you see. The smoke screens put up in autumn statement lol based once again on predictions what have been proved to be wrong time after time (who pays for this so call Independent Office of Budget R money being wasted cut them I say get everything wrong every time) I could have predicted Euro in mess still and USA and yes even China as it as clear as day they export their markets shrinking so down their growth go’s. Not rocket science they wear blindfolds and use wage board in OBR?) The thing is bottom line plan A not working wont work an austerity will go on for 10 years UNLESS a massive change of Direction and yes Iv answers for that.
On the point of fuel duty- we have a lot of rural constituencies where this is a massive issue.
Thanks for adding your views, Terry.
I wonder, however, if you could add some further identifier to your name, for the avoidance of confusion!
Cheers 🙂
Bill Le Breton,
that Professor Wren-Lewis sounds like an academic with his feet planted firmly on solid ground.
For the Lib Dems – in government and outside – the autumn statement must rank as a disappointment. Victory can be claimed on a further personal allowance increase, but David Cameron clearly squelched any hopes of any new taxes on property and wealth – Nick Clegg was reduced to shaking his head as Osborne drove this home in his speech.
Yes, and I think we have to make CLEAR that our preferred option would have been to cut government services and infrastructure spending less and reduce the deficit quicker by using such taxes, but the Conservatives would not agree to it. We have to make clear that we cannot “keep our promises” if what we need to do for that always gets blocked by the Tories. Property taxes will be unpopular, but we need to be honest and say either we find a way to pay the government’s bills, and taking some of the vast amounts of money that sloshes around in property is probably the last painful way to do this, or we will have to have further cuts – people who moan at us about cuts and moan at us about tuition fees need to be told “OK, back us when we’re fighting with the Tories in government to raise the money that’s needed for these things”. Vague hand-wavy arguments about there must be lots of rich people somewhere we can tax to raise the money (but not me, or the parents I expect to inherit a nice dollop of cash from), which is all we get from even the far left are not enough. Neither are vague hand-wavy arguments about economic growth eventually returning and bringing in money, which is what we get from the right, enough. The right have been making the vague hand-wavy arguments for years, governments have followed them, and look where we are now.
@Bill Le Breton. I love this section of the speech ‘Perhaps my policy will fail to produce extra growth and just give us higher inflation……….. At least I would have tried.’ The economy in ruins, millions more unemployed, industry destroyed, but at least he would have tried. This is why we should not let economist actually decide things anymore than I would trust a physics professor to build a bridge. Macro economic is a useful economic exercise, but not nothing more.
Stephen, if you want twenty years of Japanese style stagnation with its impact on social cohesion and life chances, so be it. We are, with this Autumn Statement, on track to clock up our first ‘lost decade’ by 2018.
The pessimistic view of life is that virtually all the current deficit is structural. I don’t believe that. There is a good argument that the output gap is much greater and the capacity for growth without inflation much higher. The pessimistic view is that, given more aggregate demand, firms will ‘take’ all of this as higher prices and none in increased output, but that is to ignore how firms compete. The pessimistic view is that the economy is shackled by zombie firms, when how many of these would be expansive given a pick up in demand?
We are crippled by fear and led by despair. Liberalism is an optimist outlook. A belief in the enterprising nature of human beings working together in social groups. At present human potential is being strangled by timid, cautious politicians, expressed as timid, cautious economic policy.
Keep hope alive Bill Le Breton, keep hope alive.
The US Fed seem to use a variant of NGDP targetting, and it’s not done them any miracles. It’s called the Taylor Rule, and they follow it in the ong-term, but sometimes depart radically from it for short periods (http://econfaculty.gmu.edu/pboettke/workshop/Spring2010/Beckworth2.pdf).
Before the financial crisis, the rich part of the world was producing more than it could consume. We know that because the poor part – places like Greece, Spain, and poor people in the US looking for houses, were able to rack up huge debts to consume what the rich part was producing. Then their lines of credit were cut, hence the present austerity in Greece, Spain, etc.
But those lines of credit were fuelling the rich’s growth. Those poor people were providing the rich with a solution to what would otherwise have been a savings paradox. Now, those customers are no more, so the rich people have to produce less, so theiir governments tax takes goes down, their unemployment goes up, and they have no growth.
I can’t see any of the present policies as solving this, nor any of the comfortably salaried Professor’s. Even if the poorer parts of the world recover and develop industries as efficient as the rich, they will just add to the problem because they’ll be doing the same thing.
Bill, if we want to just band east Asian countries around, then would you like us to pump prime our economy like China?
The problem is that everyone wants to go back to the ‘good old days of boom’, but they are gone and no matter which policy we adopt, that is a fact. Why? The answer is simple; because they castles built on sand as China is now discovering. China is sinking under its own wealth and unless Europe magically recovers in the next few years, it will go under that sand it so foolishly decided to build its castle upon.
We were playing tag with our debts by allowing ourselves to buy more than we could afford in the hope that the wealth this would make would continue to keep us above the water. We literally thought we could keep making 1 pound into 2 without any repercussions, and unsurprisingly that big black-hole eventually caught up with us. Now we are paying the price.
Regardless of what happens next , just throwing non-existent money around has been proven to be a flawed idea.
… so, one long-term solution might be to re-distribute income away from income-groups who produce more than they consume, and towards groups who consume more than they produce. This probably means taxing savers, increasing taxes on house owners (owning is a way of saving), reducing unit costs for tenants, and increasing support for the less well-off.
Another option might be to re-distrubute income away from age-groups that produce more than they consume, and towards age-groups that consume more. This might suggest some kind of lifetime planning model, so that some age-groups (young and old?) are expected and encouraged to consume more, and others (middle?) are expected and encouraged to produce more.