Waiting for growth
Waiting for the economic recovery is beginning to feel a little like waiting for Godot. You keep being told it’s going to appear but it never actually arrives.
This week was no exception, with the independent Ernst & Young ITEM club forecasters telling us the economy would only grow by 0.4 per cent this year, half what we were promised at the budget only a few weeks previously.
The reason for this is the same as it has been since late 2010. Consumers – squeezed by high prices, low wages, debt and job insecurity – are not spending money. Neither is the government; quite the reverse. Our main export markets are looking decidedly dicey. And business, while it has a few quid in its back pocket, is very sensibly keeping it stashed away or exploring overseas options rather than using it to make things that people aren’t in a mood to buy. There just isn’t anywhere for the growth to come from.
This is a problem for the government because it’s harder to cut the deficit when the economy is weak. They tell us, evoking Thatcher, that governments, like households, must live within their means and so more cuts must come if the books don’t balance. But the more apt household simile is that it’s easier to pay off the mortgage (debt) when you are in work (growth). The more this is misunderstood, the longer we will have to wait.
But take a little closer look at what they have actually committed to, and perhaps they always thought this might happen. Back in the emergency budget of June 2010, Mr Osborne sounded hawkish when he unexpectedly announced his intention to eliminate the structural deficit within five years – twice the speed offered by Labour who had only committed to halving it by the end the parliament. This had not been anticipated in the election manifestos of either the Conservatives or the Lib Dems or spelt out in the coalition agreement.
What was less clear at the time, but is now becoming very apparent, is that this was not so much a binding target as a moveable feast. The actual wording is to eliminate the structural deficit ‘by the end of a rolling five-year period’. At the time of the emergency budget, that took us to the end of the parliament. Now, it takes us to 2016-17; by autumn of this year it will have rolled on to 2017-18.
A pattern is emerging. In the run-up to the budget, the Office for Budget Responsibility negotiates with the Treasury a new package of medium-term cuts (granny tax …) in order to be able to say that the mandate is likely to be met in five years time; but before we have a chance to test the forecasting assumptions behind this assertion against some real data (this year for example it would blown out of the window if the output gap were to come in at ¾ of GDP smaller), we all move forward a year and the forecast in question becomes irrelevant. What was a tough-sounding fiscal mandate becomes more of an Eton mess.
Thankfully they did also give us a so-called ‘supplementary target’ that was fixed in time, namely that the overall level of public sector net debt as a proportion of GDP should be falling by 2015-16. Possible, but hard to achieve without a rapid acceleration in growth, which still depends on business spontaneously deciding to start spending in face of little demand. So I’m going to stick my neck out here. My prediction is that by the election, the deficit will be nearer half gone (Labour’s target) than eliminated, and the supplementary target will only be achieved by an optimistic growth forecast for that year itself.
But like in Beckett’s play, we’ll have learnt what needs to be known by watching the actions of the characters involved, without the main event ever happening.
Kitty Ussher is a research fellow at the Smith Institute and a former economic secretary to the Treasury
Conservatives, debt, deficit, economy, GDP, George Osborne, growth, Kitty Ussher, Labour, Liberal Democrats, Office for Budgetary Responsibility, treasury