The autumn statement gave George Osborne the opportunity to bask a while in the warm glow of improving economic performance. The aftermath has also seen an increase in pressure on his counterpart in Labour, Ed Balls. The Tories are keen to present an image of ‘steady as she goes’ in order to enable an electoral message of Labour endangering the recovery. I expect this message to be repeated mantra like in the run up to the election.
There were a few sleights of hand in the Gordon Brown style – giving a break on green levies here whilst simultaneously taking these from general taxation there but there were no give-aways beyond those trailed long before the statement. I imagine next year will be different as we see some tax morsels dangled before the electorate. Beyond the national insurance break on youth employment there is little to applaud in this statement.
Two things have gained in clarity as a result of the statement. The first is the commitment to an ideological austerity in order to tear up the social contract that has remained broadly in place since the Second World War. This has been brilliantly elucidated upon by Will Hutton. The second is that Osborne seemingly sees no need to tackle the fundamental flaws in the foundation of the present recovery. The philosophy of steady as she goes thus becomes a rather baffling reluctance to acknowledge any weakness in our current economic model.
One issue arising from the first point is that the government is guilty, again (cf. NHS, education etc), of misstating its intentions to the public. Austerity was presented as an unfortunate and unwanted result of the economic crash. The government needed to become more like the prudent housewife and get its books in order. What we will see instead is a shredding of public expenditure if the Tories are given free rein.
The inherent weaknesses in the economic recovery and Osborne’s reluctance to tackle the issue is perhaps more surprising. The current recovery will not benefit most people. Median incomes (as per the IFS) will continue to fall for the next couple of years. The recovery, such as it is, is based on increasing asset prices propped up by several factors including the continuation of quantitative easing, low interest rates, a housing bubble exacerbated by shortage of stock in key areas and a growth in demand fuelled by personal debt.
Private investment is still 11.6% below its pre-crash peak in 2007. This continuing slump in private investment will serve to negatively impact productivity and thus contribute to continued wage stagnation. In such circumstances any growth in demand in is likely to come from an increase in personal debt. Whilst the public worked towards deleveraging in the past few years the purse strings have loosened once more. This is exacerbated by increasing asset (particularly house) prices which further encourage this profligacy. Osborne has enacted very little to promote the investment required in order to make the country more productive. Instead he has fuelled demand with commitments such as help to buy.
Similarly public investment (in line with the ideological austerity) continues to be neglected. For electoral reasons the government has all but abandoned one ‘spade ready’ project in Heathrow and HS2 looks as though it will be shunted to the sidings. Beyond that the government continues to do little to invest in housing stock or the country’s general infrastructure.
With no attempt by the government to recalibrate the economy the recovery remains worryingly vulnerable to externalities. Another crisis in the Eurozone would unbalance the recovery even further for example. Continuing problems in the Middle East or a conflagration with Russia due to the situation in the Ukraine are all events that could send shockwaves worldwide and blow away the froth of the British recovery. The lack of any substantive attempt by the government to refocus the economy only serves to accentuate this issue.