Osborne – Losing The Numbers Game

As in the aftermath of practically all Budgets, the main focus of media comment in the wake of Osborne’s presentation in the House of Commons on Wednesday was on the headline-grabbing micro-economic  measures – the 1p off beer duty, the cancellation in the planned rise in fuel duty, the child-care allowance and the row that erupted over eligibility for it, and the increase in income tax personal allowance. This is understandable: it’s what the vast majority of the public use to relate the budget to their immediate circumstances, after all, and for the MSM info-tainment sector it provides a ready source of vox-pops.

George Osborne budget

But in many ways this is misplaced, since it means less attention has been given to the wider overall macro-economic picture that the Treasury Red Book, and the simultaneous releases by the Office for Budget Responsibility and the Institute for Fiscal Studies. Osborne the inveterate political strategist won’t necessarily regret this, though, because the picture they display is very, very worrying indeed – it’s one of an economy mired in deficit and debt, with its public finances fixed firmly on an unsustainable path. Because the macro-economic numbers are simply horrible.

Osborne likes to describe himself as fiscally cautious, but a monetary activist. This is a troublesome combination for an economy in the shape that Britain’s finds itself in, because in reality Osborne is too timid & cautious on fiscal policy where he should be bold & radical, but alarmingly radical to the point of recklessness on monetary policy where he should be more risk-averse & conservative.

Take the annual budget deficits, as depicted by the OBR (Table 4.36):

Osborne has had to borrow roughly about £120bn for each of the last 3 fiscal years, or, in effect, £1 of every £5 spent. His medium-term outlook presented in 2010 envisaged that this would be falling by now, but the latest estimates show a deficit of £42bn even in 2017-18. We are planning to add another £433bn to the already sky-high national debt, even before we start paying some of down – and that’s on the prediction that growth will resume by 2015, the same prediction for 2-3 years in the future that’s been wrong in each of Osborne’s previous three Budgets. This is deficit spending of Brownite proportions.

In not cutting taxes further to promote a resumption of tax-generating business activity, and reducing public spending considerably more, especially in ring-fenced areas of overseas aid & the NHS, too little is being done to bring down the annual deficit to the point where debt can start to be reduced instead of being added to.

The debt picture is no less deeply troubling. The Treasury Red Book shows how public sector net debt has been higher as a percentage of GDP than previously predicted, but the scary graphic is the line now showing the debt-to-GDP ratio solidly at 85% for 2 or 3 fiscal years.

Even this conveniently ignores that total public indebtedness, including PFI & pension funds etc, amounts to c£5trn. Both theory and empirical evidence suggest that, once an economy’s debt/GDP ratio hits 85% or 90%, recovery becomes exponentially more difficult and takes far, far longer – I have seen a recovery period of two decades predicted for a 100% debt/GDP ratio. Yet against this background, more Quantitative Easing is mooted, despite successive tranches of the £375bn of QE undertaken so far having a smaller and smaller effect. Add in the aggregate c.£360bn of annual budget deficits since the Coalition came to power in 2010, and we’ve had a c.£735bn “stimulus” to the economy. Osborne in fact is turning out to be more neo-Keynesian than the neo-Keynesians.

Osborne virtually admits, quite openly, the disproportionate hope he’s pinning on the arrival of Mark Carney as the new Bank of England Governor in undertaking what he envisages as monetary activism. Most commentators assume this to mean at least more QE (though, thankfully, the minutes of the most recent meeting of the BoE’s Monetary Policy Committee show that most members voted against), but Osborne also raise the prospect of the use of “unconventional monetary instruments”. These prescriptions have ramifications for inflation, and therefore growth-inhibiting real earnings attrition, likely to delay further a resumption of investment, production and consumption. The assumption that Osborne is ready to accommodate inflation to erode the value of debt, despite the damage to the real economy, gets more and more difficult to discount.

It’s easy to see why the view that the UK economy is poised on the edge of a fiscal and monetary cliff is gaining traction. Yet many of Osborne’s Budget measures, particularly in their timing, seem designed specifically to generate a superficial, illusory feel-good factor in the run-up to the 2015 General Election. It may work – up to a point – in boosting the Conservatives’ vote numbers: but in the real numbers game, Osborne is gambling and losing.

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