Wednesday, 30 November 2011

Autumn Statement, 2011

Yesterday, Chancellor George Osborne delivered his Autumn Statement to parliament. He did one last year as well, only back then he called it his “comprehensive spending review.” Last year he promised he’d have reduced the deficit to nil by 2014/15 – the last year in office for this government. However yesterday that fell by the wayside, he no-longer has any realistic prospect of stopping borrowing.

Yesterday, timed to coincide with the Statement, the Office of Budget Responsibility (OBR) released new forecasts for growth, and basically, they’ve been halved since the OBR last pronounced in March this year.

Our GDP is predicted to grow as follows:
    Year     Growth
    2011/12  +0.9%
    2012/13  +0.7%
    2013/14  +2.1%
    2014/15  +3.0%
    2015/16  +3.0%
Given the OBR was wrong by a straight 100% over the last eight months I think we can consign those figures to the trash without delay. However, the Chancellor did use them as the basis for his Statement. He noted with satisfaction that no recession is forecast.

The flip side of a GDP failing to grow is a deficit ballooning out of control. Here are Osborne’s new forecasts, as compared with his forecasts in the budget in March this year.
    Year         Autumn Statement      Budget 2011
    2011/12      £127bn                £122bn
    2012/13      £120bn                £101bn
    2013/14      £120bn                £70bn
    2014/15      £79bn                 £46bn
So that’s an extra £100bn of borrowing during the course of this parliament at the stroke of a pen.

George’s solution to our problems is simple: he has decided to cut spending even more, but then spend all the money saved - on infrastructure projects. He has taken a knife to the overseas aid budget; he’s going follow the current public sector wage freeze which expires in a year with a 1% cap, and he’s going to make public sector pay “responsive” to local job markets.

This last item sounds innocuous but has the potential to be massive. Past governments have relocated some of the labour intensive Whitehall departments to very poor areas of the country. Since civil servants are paid on nationally agreed rates you can get a big building with a thousand public sector workers inside acting as the anchor for a local deprived economy. A thousand guaranteed salaries are spent into the High Street of some poor Welsh town and that money keeps the town in business. Now it seems that Osborne intends to pay civil servants in poor areas a lesser wage. This is likely to be controversial. Labour greeted this remark with a sharp intake of breath.

Osborne also raised some cash by increasing the pension age from 66 to 67 for anyone born during the 1960s. That’s an extra year’s taxes from 10 million people, and an extra year he doesn’t have to pay them a pension. (Younger people already knew they were working until the age of 67.)

Then comes the spending. The Chancellor is going to “credit ease” to the tune of £44bn. He’ll be handing this money to the banks to be lent out to businesses with a turnover of less than £50 million. This is effectively “printed” money; it doesn’t come out of the budget.

He will also be funding 500 major infrastructure projects: roads, railways, bridges, power stations; comms networks – you name it, he’s building some.

Also, a lot of house building is going to happen. People renting council houses are to be allowed to buy the house in which they live for a 50% discount off the market rate. Osborne has pledged that for every house so sold another will be built. (People living in privately rented houses are wondering when they are going to be gifted half a house!)

The government will also provide mortgage guarantees to allow people with little cash to get on the housing ladder. You will be able to borrow 95% of the value of a house; finding only the 5% yourself, while the government guarantees the next 8% so the lender’s liability is only 87%. This applies to new build houses only.

Osborne renewed his pledge to look at merging National Insurance and Income Tax. So far every government since the year dot has tried but failed to do this.

There’s a new deal for unemployed young people. Hard on the heels of all the previous failed schemes: YOPS, TOPS, MOPS, etc we now have the “Youth Contract”. The government will pay for a job or apprenticeship for young people, and take away their benefits if they refuse to sign up.

George Osborne was on his feet for about 45 minutes. During this time Labour attempted to convey their disapproval. Miliband tried shaking his head and looking pensive, to no great effect. Shadow Chancellor Ed Balls did it better: he sat there the whole 45 minutes in open-mouthed, blank-faced incredulity at the sheer ineptitude of the government. Then as Osborne commended his Statement to the House and sat down, Balls rose to respond.

It was the usual gloat about how things weren’t going as well as expected and he trotted out his favourite cutting too far too fast message. Since everyone knows his government created the mess in the first place he was never going to get much traction.

So what does it all boil down to? Well, more austerity to start with; making people work longer, harder, for less. Sadly this is probably the right solution to our problems. There isn’t really any alternative.

The government is also stoking up housing. Right-to-buy with a 50% discount is a big, big incentive. The money will then be used to build more houses. There will also be mortgage indemnities for buying new build houses. Whenever a house changes hands there is a lot of ancillary spending: new furnishings, new kitchens and the like. This boosts the economy. However none of the government’s plans blow more air into the housing bubble. The subsidies apply only to new houses, or to houses which were previously in public ownership. This is vital – one of the major causes of our current economic problems was the house price bubble, and nothing should be done which sustains or re-inflates this bubble. Osborne seems to have understood this.

Although Osborne was pretty straight forwards in his presentation; especially compared to the smoke and mirrors we are used to from Gordon Brown, he did fudge a couple of issues. At one point he stated that he would be up-rating pensions and benefits by 5.2% (September’s CPI number) and then said that although this was less than the RPI rise this was OK because inflation was expected to fall in the future. Does he not realise that the up-rating is to compensate for the loss of value in the pension or benefit which has already happened during the past year? Future falls in inflation will not offset the loss of value already incurred – barring actual deflation, which is not on the cards. I’m sure he does understand this; he’s not stupid, but he seemed to think his audience was.

He also fudged the issue of interest rates. He seems to regard keeping them very low as an achievement. He rightly remarked that every 1% rise in the mortgage rate would cost British mortgage payers an extra £10bn, but then went on to claim that thanks to his stewardship of the economy the UK still had its AAA credit rating and was borrowing on the bond markets at the same rate as Germany. In fact the bond rates and the BoE base rate are only very loosely connected. The base rate is 0.5%, and this acts as a base for mortgage rates, while the UK gilt bond rate (10 years) is about 2.3%. The two are not the same and don’t affect each other much. None of the parliamentarians in the House seemed to realise this when he took credit for keeping mortgage rates low.

All in all, Osborne is doing right thing. At least as right as he can get subject to the constraints he operates within. Of course a BNP government could and would create two million jobs pretty much overnight, by deporting immigrants, but the Tories are never going to do that.

GO now has no forecast for when he will stop borrowing and that is a bad thing. Stopping borrowing is a prerequisite for starting to pay down the national debt. We cannot just let the debt grow forever. If we did then one day all government spending would be dedicated to servicing the debt and there would be no public services at all. The government now seems to have settled on a lesser ambition of controlling the debt servicing cost rather than the debt itself. With future GDP growth, with a triple-A credit rating, with a following wind and some luck, they may actually keep the cost of the debt growing more slowly than our national income – which is something, I suppose.

No comments: