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Osborne's spending review did not tell the (fiscal) hole story Osborne's spending review did not tell the (fiscal) hole story
(3 months later)
George Osborne's statement on Wednesday united a series of cobbled-together, back of the envelope spending cuts into a fairly coherent narrative on rebuilding the battered British economy, to "raise our national game".George Osborne's statement on Wednesday united a series of cobbled-together, back of the envelope spending cuts into a fairly coherent narrative on rebuilding the battered British economy, to "raise our national game".
Hence the emphasis on infrastructure, on science and technology (the miracle substance graphene, developed in Manchester, featured yet again), and on education.Hence the emphasis on infrastructure, on science and technology (the miracle substance graphene, developed in Manchester, featured yet again), and on education.
Dealing with the welfare bill was presented as an attack on "a something for nothing" culture, but also as an effort to keep the total size of the public sector in check – and hence, the Tories hope, unleash the private sector to create growth.Dealing with the welfare bill was presented as an attack on "a something for nothing" culture, but also as an effort to keep the total size of the public sector in check – and hence, the Tories hope, unleash the private sector to create growth.
But it is also important not to lose sight of what the chancellor did not say. First, he made no mention of the "fiscal rules" he set out in 2010 replacing Gordon Brown's discredited regime.But it is also important not to lose sight of what the chancellor did not say. First, he made no mention of the "fiscal rules" he set out in 2010 replacing Gordon Brown's discredited regime.
Back then Osborne promised to eliminate the structural deficit – the measure that excludes the ebbs and flows of the economic cycle – over a five-year period, and to start reducing the national debt as a share of GDP by 2015-16, which as it happens, is the year covered by spending review.Back then Osborne promised to eliminate the structural deficit – the measure that excludes the ebbs and flows of the economic cycle – over a five-year period, and to start reducing the national debt as a share of GDP by 2015-16, which as it happens, is the year covered by spending review.
Both of those rules have effectively been ditched, as slow growth has blown a hole in the chancellor's logic. We've discovered that the five-year time limit for eliminating the deficit was actually a rolling one – which in effect, therefore, never comes. And the debt-to-GDP ratio is now expected to continue rising until 2016-17, and to peak at 85.6%, instead of the 79.9% Osborne expected when he came to power.Both of those rules have effectively been ditched, as slow growth has blown a hole in the chancellor's logic. We've discovered that the five-year time limit for eliminating the deficit was actually a rolling one – which in effect, therefore, never comes. And the debt-to-GDP ratio is now expected to continue rising until 2016-17, and to peak at 85.6%, instead of the 79.9% Osborne expected when he came to power.
The AAA credit rating Osborne saw as a test of his budget-cutting machismo has also been lost.The AAA credit rating Osborne saw as a test of his budget-cutting machismo has also been lost.
"To an extent, fiscal policy is now operating with no framework, with no constraints," says Duncan Weldon, economist at the TUC. If things had gone to plan, he says, and the Treasury had been running a structural budget surplus of 0.8% of GDP, Osborne could have banked half of that, and stood up at next spring's budget to announce a 2p cut in the basic rate of income tax."To an extent, fiscal policy is now operating with no framework, with no constraints," says Duncan Weldon, economist at the TUC. If things had gone to plan, he says, and the Treasury had been running a structural budget surplus of 0.8% of GDP, Osborne could have banked half of that, and stood up at next spring's budget to announce a 2p cut in the basic rate of income tax.
The second lacuna in the chancellor's statement was what he expects to happen once the first year of the next parliament (2015-16) is safely out of the way.The second lacuna in the chancellor's statement was what he expects to happen once the first year of the next parliament (2015-16) is safely out of the way.
The overall spending "envelope", as the Treasury calls it, for the following two years, has already been published, and implies further, deep, cuts.The overall spending "envelope", as the Treasury calls it, for the following two years, has already been published, and implies further, deep, cuts.
The Institute for Public Policy Research reckons that if the Tories extend their promise to protect the NHS and overseas aid spending, the business department could get another £2.3bn cut in its annual budget by 2017-18, compared with the £600m reduction it has just agreed; while education could face a £2bn cut.The Institute for Public Policy Research reckons that if the Tories extend their promise to protect the NHS and overseas aid spending, the business department could get another £2.3bn cut in its annual budget by 2017-18, compared with the £600m reduction it has just agreed; while education could face a £2bn cut.
In reality, most analysts, including the Institute for Fiscal Studies, believe cuts on that sort of scale would be politically, and practically, unachievable. Instead, they expect at least some of the gap to be filled through tax rises, once the general election is over – whoever wins.In reality, most analysts, including the Institute for Fiscal Studies, believe cuts on that sort of scale would be politically, and practically, unachievable. Instead, they expect at least some of the gap to be filled through tax rises, once the general election is over – whoever wins.
Ed Balls made clear on Wednesday that he plans to paint Labour as the party that will get to grips with the deficit problem the coalition has failed to crack, and to do so in a "fair" way. That may well include tax increases, but don't expect to hear too much about them before May 2015.Ed Balls made clear on Wednesday that he plans to paint Labour as the party that will get to grips with the deficit problem the coalition has failed to crack, and to do so in a "fair" way. That may well include tax increases, but don't expect to hear too much about them before May 2015.
Once the Treasury published the spending review documents, it also became clear that like most of the chancellor's other recent "infrastructure boosts", the renewed emphasis on capital spending was more about presentation than hard cash.Once the Treasury published the spending review documents, it also became clear that like most of the chancellor's other recent "infrastructure boosts", the renewed emphasis on capital spending was more about presentation than hard cash.
The £50bn infrastructure budget for 2015-16 that the chancellor made much of is actually exactly the same as the budget for 2014-15: "it's steady", a Treasury official conceded. Once inflation is taken into account, that means capital spending will fall; and even in cash terms, it remains well below the levels the coalition inherited in 2010-11.The £50bn infrastructure budget for 2015-16 that the chancellor made much of is actually exactly the same as the budget for 2014-15: "it's steady", a Treasury official conceded. Once inflation is taken into account, that means capital spending will fall; and even in cash terms, it remains well below the levels the coalition inherited in 2010-11.
The Treasury also had to defend the decision to present the figures in gross terms, rather than the more widely-used measure of net investment. The gross figure excludes "depreciation" - the deteriorating state of existing infrastructure. On a net basis, capital spending is nearer £25bn.The Treasury also had to defend the decision to present the figures in gross terms, rather than the more widely-used measure of net investment. The gross figure excludes "depreciation" - the deteriorating state of existing infrastructure. On a net basis, capital spending is nearer £25bn.
Historically, governments have often slashed capital spending as an easy target in hard times; but investment levels are unusually low in the UK, which economists argue is a big weakness.Historically, governments have often slashed capital spending as an easy target in hard times; but investment levels are unusually low in the UK, which economists argue is a big weakness.
Whichever projects Danny Alexander announces on Thursday these latest infrastructure spending plans are not the short-term economic boost recommended by the International Monetary Fund, which used its report on the UK to call for up to £10bn of spending to be brought forward.Whichever projects Danny Alexander announces on Thursday these latest infrastructure spending plans are not the short-term economic boost recommended by the International Monetary Fund, which used its report on the UK to call for up to £10bn of spending to be brought forward.
Neither will the plans be substantial enough to help rebalance the economy, as the chancellor claims to want, from consumer spending to exports; from south to north.Neither will the plans be substantial enough to help rebalance the economy, as the chancellor claims to want, from consumer spending to exports; from south to north.
Lastly, it's always a bad sign when chancellors start trumpeting projects that should be beneath their notice; and it's an even worse sign when they do so repeatedly.Lastly, it's always a bad sign when chancellors start trumpeting projects that should be beneath their notice; and it's an even worse sign when they do so repeatedly.
For Gordon Brown, it was tax relief for cycle helmets and a statue of the Queen mother; for For Osborne, it's the A14. He first announced that he was going to upgrade the Rugby-Felixstowe trunk road (specifically, the Kettering bypass section), in the autumn statement of 2011; on Wednesday, the A14 got another mention.For Gordon Brown, it was tax relief for cycle helmets and a statue of the Queen mother; for For Osborne, it's the A14. He first announced that he was going to upgrade the Rugby-Felixstowe trunk road (specifically, the Kettering bypass section), in the autumn statement of 2011; on Wednesday, the A14 got another mention.
There could be no better indication of how thinly the Treasury is spreading what these days we're meant to take as good news.There could be no better indication of how thinly the Treasury is spreading what these days we're meant to take as good news.
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