Labour's challenge is to propose a genuine alternative
The autumn statement represents what happens if you adopt the wrong economic policy for the times we live in. For reasons of misguided economics or political priorities, probably both, the government has committed to more years of spending cuts. Meanwhile, though the economy is currently growing at a reasonable pace (+2.3 per cent over twelve months), tax revenues have not followed suit and so annual borrowing and the deficit remain high. The financial crisis took place in 2007-9. The Conservatives won power, in coalition, in 2010 promising to balance the books because otherwise the markets would mistake us for Greece. Now, in 2015, we have net debt to GDP forecast to be 83.1 per cent this financial year.
Spending is forecast to decline at a slightly slower rate than in the previous parliament. In addition, the overall departmental spending decline is forecast to be shallower than the July budget implied. But of course key areas have been protected, meaning that other departments have seen severe cuts and these are going to continue. The bearer of much of this pain has been local government, with councillors having to make some very tough and heart-rending decisions. We are now well beyond making the ‘easy’ cuts or the even more challenging efficiency savings which would be good for taxpayers in the long run as they benefit from reforms. Rather, local governments are having to cut adult and childcare services. The chancellor has announced a hypothecated top up tax to council tax to reduce the burden, but we will need to look carefully at the overall settlement for local government, an area not protected from cuts. The same goes for other pledges in this statement.
The tax credits debacle appears to have been resolved by abandoning the plans altogether. A consequence is that the government will now, according to the Office for Budget Responsibility, breach its welfare cap in 2016-17, 2017-18 and 2018-19. As with other fiscal rules, at the end of the day the government can do what it likes. The government has also been helped by changes in OBR modelling and forecast assumptions, and it will offset some of its looser policy by tax rises, both via council tax and via extra stamp duty on buy-to-let and second homes. The OBR’s overall GDP forecast is essentially unchanged from July. There will be no slowdown for the next five years and GDP growth will always be above 2.3 per cent and that iss official. Reality will be different, though we do not yet know how.
The OBR forecasts strong growth in business investment. Of note is a significant rise in government investment spending, both in the early years of the forecast period and then a further jump in 2020-21. While household debt as a proportion of income is not forecast to rise as quickly as in July’s outlook, it is still assumed to be over 160 per cent in five years, which means household indebtedness helps pay for austerity. The key uncertainty however remains productivity, which remains low and well below the pre-crisis trend. Should this not recover, for whatever reason, the outlook for the government’s fiscal plans, and the United Kingdom economy, will look very different.
As always, the detail of this statement needs to be scrutinised carefully. Though the headlines were well crafted, the underlying policy is essentially the same. The challenge to Labour will be to propose a genuine alternative. However we can see already, and with the tax credits u-turn and measures to accommodate it, that the government’s economic policy can be subject to pressure especially since another Conservative party leadership election looms.
This article was first published by Progress on 25 November 2015.