Thursday, 19 March 2015

Analysis: Short-term economic shambles

Andrew Fisher assesses the 2015 Budget and finds George Osborne's hubris doesn't hide his failure

The Chancellor was in hubristic mood on Budget Day 2015, with some bold claims to open his remarks. "Living standards will be higher than when we came to office" he informed the Commons, yet they won't.

"Out of the red and into the black – Britain is back paying its way in the world", Osborne continued, except its not.

On living standards, LEAP Chair John McDonnell MP tweeted during the Budget speech:

And indeed they don't bear much reality to the available data either as the chart below via the Resolution Foundation shows.

On only one measure 'might' living standards be back to their 2010 level - and that's on a deeply flawed measure that banks the rise in people's house prices. On the main two measures we remain some way behind and, as the blue line shows, for the median household there is some way to go.

Median wages are down in real terms by more than 5%, which makes George's proposed "savings revolution" a little hard to believe. All the more so when you consider Osborne's growth model is based on rising household debt - which will rise to levels last seen at the point of the crash, and go beyond them by 2020:

After seven years of wages falling in real terms, the recent respite has been due to falling oil prices rather than any successful policy of the Chancellor. To date, wage rises have not discernably picked up.

So is Britain "walking tall" and paying its way in the world? Whichever way you interpret it, no. We are borrowing £90 billion this year, which the OBR confirms is down 41% in cash terms (not eradicated like Osborne once said it would be), and so we are still running a large deficit, adding to the debt.

More commonly the phrase 'a country that pays its way' is used to describe a country that is a great trading nation. As Newsnight's Evan Davis pointed out to a rather battered Treasury minister David Gauke, the UK has a trade deficit of 6%, which has risen over the course of this Parliament (as the chart below shows)

One claim of Osborne's that can't be disputed is that the UK economy is growing again - even though that's not translating into wage growth for everyone - and that growth is sustained. In fact the OBR revised its growth forecast upwards. And what coalition policy from the genius of Osborne has provoked this optimism? The OBR explains, its because the government continues to miss its immigration target.  

The economy will grow stronger because of increased migration ... don't expect David Cameron or Theresa May to be proclaiming this from the rooftops, and it's doubtful Mr Farage will mention it either!

Back in 2010, Osborne's plan - the long-term economic plan (that Tory folklore would have us believe Osborne has doggedly stuck to in the face of Labour heckles and Lib Dem resistance) - suggested that the UK's debt to GDP ratio would be 67.4% in 2015/16. Instead, Osborne announced we actually have a debt ratio of 80.2%.

One significant change in this Budget was the marginal easing in the level of cuts so that instead of taking us back to 1930s public spending levels (as proposed in the 2014 Autumn Statement), instead we'll only be transported back to 1964 - though with the bizarre spectacle of acute cuts in the second and third years of the next Parliament, before significant easing in years four and five.

The OBR described this as a "rollercoaster" and a particular scary one since it involves "a much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years". So intensified austerity in the early years of the next Parliament, which will be sharper than in the first years of this Parliament when austerity crashed the economy again. But what is the point of this rollercoaster - they are fun at the theme park, but who wants an economy run like that?

Overall though we should not overstate the relevance of this Budget. As the OBR stated, "The Coalition Government's policy decisions in this Budget are not expected to have a material impact on the economy"... if only that was true of the previous five budgets.

This was ultimately a budget to spin a bad record, a short-term political manoeuvre rather than a long term economic strategy. It was, like much of Osborne's tenure in 11 Downing Street, a shambles cleverly spun. 

However, while the general election in May makes all this subject to change, unless we the electorate deliver a sharp change in direction, austerity and the dodgy spin that accompanies it will remain.

No comments: