Economic miracle. No I don’t think so somehow. There might be some trouble brewing don’t you know.
George Osborne styled Britain as the “comeback country” in Wednesday’s budget. Yet the carefully crafted narrative, in which he plays the sombre statesman stewarding the economy back to calmer waters, barely disguises the nakedly political nature of many of his decisions — and the serious risks that remain.
First, Osborne has only been able to cut debt as a share of GDP this year – hitting a target he was expected to miss as recently as December – and promise to call a halt to austerity before the end of the next parliament, as a result of a two-stage act of political conjuring.
Instead of the five-year austerity drive he pencilled in as recently as December, he has now set public spending on what the independent Office for Budget Responsibility (OBR) called a “rollercoaster”.
The Treasury will now swing the axe more sharply than previously planned in 2016-17 and 2017-18, before switching back to deliver what the OBR calls “the biggest increase in real spending for a decade in 2019-20”.
It’s a boom-bust spending pattern for public services no Whitehall mandarin would deliberately plan — but it will help Osborne to ward off the accusation that he is on an ideological crusade to shrink the size of the state.
Second, the chancellor is counting on the proceeds of a pair of banking privatisations. He has announced plans to sell off a mountain of mortgages the government has owned since the bank bailouts, and a fresh batch of Lloyds Bank shares.
The handy £20bn proceeds – which, conveniently, he plans to pocket by the end of 2015 – will make no difference to the size of the public debt in the long term, because the state is losing out on the mortgage repayments and dividend income it would otherwise have received.
But critically, banking the income over the next 12 months allows the chancellor to fulfil his aim that debt would be falling as a share of GDP by 2015-16.
When it comes to the health of the economy, Osborne singled out international factors – not least the standoff between the combative Greek finance minister, Yanis Varoufakis, and his eurozone partners – as the key threats facing the economy.
Yet perhaps the largest question mark hanging over the future of Britain’s economy lies at home, in our woefully weak productivity record.
Rising productivity – the amount of output each worker produces – is the key to generating sustainable economic growth and higher living standards.
But while the UK economy has been creating jobs at the rate of more than 100,000 a quarter, allowing Osborne to claim that “Britain is working”, the fact is these workers are producing far less – and so being paid much less generously – than economists would predict.
In this latest set of forecasts, the OBR has scaled back its expectations for productivity growth; but it still expects a recovery to something like normal growth rates. And no one knows whether that will yet prove over-optimistic. As the OBR puts it: “Since it is difficult to explain the abrupt fall and persistent weakness of productivity in recent years, it is also hard to judge when or if productivity growth will return to its historical average”.
The balance of growth – between saving and consumption, imports and exports, debt-fuelled property speculation and sustainable long-term investment – is also far from what the chancellor hoped for. The OBR says the current account deficit for 2014 – probably the best measure of whether Britain can “pay its way in the world”, as Osborne likes to say – is likely to be at its highest level since the 1830s.
And two more inconvenient facts mar Osborne’s claim to have put Britain back on the road to recovery with the “long-term economic plan” that even the most disinterested voter must by now be bored of hearing about.
First, most of the modest upgrade to the Wednesday’s OBR forecasts for Britain’s long-term growth potential resulted not from the government’s economic management; not even from falling oil prices, which should boost consumers’ living standards and cut the cost of production for many businesses. Instead, it came from higher-than-expected inward migration, which boosts the size of the workforce.
“We now assume that net migration flows will tend towards 165,000 in the long term,” it says. That adds 0.6% to potential growth – the speed at which it can grow without stoking inflation – over the next five years.
Second, the recovery only really got off the ground in 2012, when the chancellor made a deliberate decision to ease off on the pace of austerity. We may finally have reached the sunlit uplands of the “comeback country”; but we might have got here sooner.
guardian.co.uk © Guardian News & Media Limited 2010