Howard Reed (Co-Editor of Plan B and Director of Landman Economics) writes for us about what he sees as a malicious Autumn Statement from a failed Chancellor determined to spend five years assaulting the UK’s poor and vulnerable.
Today’s Autumn Statement marked a point just beyond the halfway stage in this parliament – and therefore, of George Osborne’s tenure at Number 11 Downing Street. He’s virtually guaranteed five years in the job because David Cameron has shown extreme reluctance to get rid of any members of his “inner circle”, no matter how badly they are performing. But at that point, it looks increasingly likely (based on current polling) that in May 2015, the British electorate will say “enough is enough” and eject Cameron and Osborne from office. Given what Mr Osborne has managed to “achieve” so far in economic policy, this is very far from being surprising.
Firstly, let us consider Mr Osborne’s macroeconomic record. In its first set of projections published just after the Coalition Government came to office in 2010, the Office for Budget Responsibility forecast that Gross Domestic Product would grow by 2.8 percent in real terms in 2012. In today’s Autumn Statement, the equivalent forecast was minus 0.1 percent. In June 2010 the OBR forecast that the spending plans of the last Labour government – caricatured by Osborne as spendthrifts incapable of getting the deficit in the public finances under control – would reduce the cyclically-adjusted budget deficit from 8 percent of GDP in 2010/11 to 2.8 percent of GDP in the 2014/15 tax year. Osborne dismissed this rate of deficit reduction as far too slow and announced £40 billion of additional fiscal consolidation (spending cuts and tax rises) between 2010/11 and 2014/15, aimed for a cyclically-adjusted surplus on current budget by 2014/15. And the results? The latest OBR projections show that the cyclically adjusted budget deficit is projected to be 2.9 percent of GDP in 2014/15 – actually slightly worse than the previous government’s projections for the same time period! In other words the net effect on the UK’s medium-term fiscal outlook of the £40bn of extra austerity (on top of Labour plans) announced by Osborne in the 2010 Emergency Budget was zero – or even slightly worse than zero.
Apologists for austerity (of which there are increasingly few) protest that the apparent failure of Mr Osborne’s “Plan A” is due to circumstances outside the UK’s control. Over the last two years the OBR has a range of villains on which it has tried to pin the blame including higher-than-expected inflation (last year), and poor UK export performance (this year). What these diversionary tactics ignore, however, is the fundamental role of the UK as a cheerleader for austerity over the last three years. Under the previous government Gordon Brown and Alistair Darling played a key role in persuading most developed economies to coordinate a fiscal stimulus in response to the 2008 financial meltdown – a stimulus which had started to produce promising results by 2010. By the same token, Osborne and Cameron played a key role in persuading most developed economies (with the partial exception of the US) to implement co-ordinated austerity. The economic consequences have been disastrous – turning a severe recession into a depression which threatens the survival of Europe as an economic entity. Even an organisation as staid as the International Monetary Fund now admits that co-ordinated fiscal tightening in an economic depression can be self-defeating. Thus, below-par UK economic growth and export performance are not surprise factors emerging from left-field, but are an indirect consequence (via Europe) of the austerity mania which has been Britain’s only successful export industry these past three years. Unfortunately this message has still not got through to die-hard followers of orthodoxy in the Coalition Government – and indeed the OBR, which still insists on using a discredited set of multipliers in its economic forecasts (which are, consequently, predictably and repeatedly over-optimistic).
But if austerity has done nothing to improve the UK’s fiscal position, it has done all too much to make low-to-middle income families worse off, with the biggest losses for those at the bottom of the pile. The Coalition’s main strategy on tax and benefits is to relentlessly reduce benefits for the most vulnerable children and people of working age in our society – most recently with an announcement that increases in most benefits and tax credits will be limited to 1% per year for the next three years. At the same time the Government also hammered these families with a 2.5 percentage point increase in VAT in 2011. This helps pay for increases in the income tax personal allowance that give most benefit to middle-to-high income families, and a 5p-in-the-pound income tax cut for people earning over £150,000 per year. Meanwhile, as my analysis for the TUC has shown, large-scale reductions on spending on public services such as education, social care, housing and active labour market policies tend to hit the poorest hardest – including pensioners, who are being shielded from most of the benefit cuts. Today’s decision to increase capital investment spending by £5 billion over the next two years would be a welcome acknowledgement of the folly of cutting essential spending on infrastructure in a depression, were it not for the fact that this £5 billion is being diverted from other spending, and will hence have no effect on the overall pace or depth of austerity, but will excerbate the squeeze on service delivery. Meanwhile, the weakness of the UK economy – coupled with the fact we are outside the Eurozone – means that the UK Government could borrow at record low interest rates to fund infrastructure investment, but sadly Mr Osborne has chosen to totally ignore this opportunity.
Any reasonable Chancellor of the Exchequer who took notice of the evidence base on the effects of his or her policies would have given the current austerity drive up as a bad job a year or more ago, and would now be grasping for a “Plan B” along the lines set out by Compass one year ago (we’ll be updating this publication by the end of this year). However, Mr Osborne is neither reasonable nor evidence based – his version of “Plan B” is to do “Plan A” for longer. Thus, the UK public has nothing to look forward to from the present administration except more of the same – permanent austerity and ever-more-regressive tax and spending measures, until either Mr Osborne’s term expires, or the poorest and most vulnerable in society do. Fortunately Mr Osborne appears to have only just over two years left to inflict further damage on the UK economy. Sadly, for anyone with the misfortune to be sick, disabled, unemployed, earning minimum wage or a child in a low income household, two years is going to seem like a very long time.