The Autumn Statement brought good news - but not enough for the self-congratulation we saw

 

The Chancellor's Autumn Statement certainly contained some good news - but not enough to justify the self-congratulation that we saw, given continued concerns about how well founded the recovery is and the failure to address longer term and structural problems.

After several years when the economy has essentially flatlined there is now clearly an increase in economic activity and a rise in both consumer and business confidence. GDP growth next year is predicted to come in at 2.4 per cent, close to the historical trend rate. In comparative terms this would be one of the strongest growth rates in the OECD. The projected figures for government borrowing are also welcome, although the Chancellor has been overoptimistic on this score before.

However there are several major caveats. Although the public-sector deficit may finally be on the way down, the share of national income taken by government spending is still far too high and this leaves little scope for the kinds of reductions in taxation needed for increased private spending and investment. It is also not clear that the growth we are seeing is 'real' sustainable growth based on genuine rises in productivity and a corresponding increase in the productive capacity of the economic resources of the country. Too much of the recovery is ultimately based upon credit funded consumption rather than investment and consequent improvements in efficiency. There is a real danger that in less than two years we will see serious overheating in the UK economy with tightening labour markets, higher inflation and another sharp rise in house prices. In that event there would be a rise in interest rates, whatever the Bank of England may say now, and the consequences would be serious. This is because of the third major caveat, the enormous overhang of private debt that is left over from the boom years of the noughties which has still not been addressed.

Yet again, there was no serious effort to make the kinds of supply-side reforms that are needed to have sustainable good growth as opposed to short lived credit-based growth. In particular, radical reform of the land-use planning system is desperately needed to allow the building of enough houses to meet accumulated demand (and also commercial and retail space to reduce high fixed costs for businesses). The Chancellor recognised the need for more housebuilding but there has not been the kind of action that is required to facilitate this.

Other underlying and increasingly acute problems were ignored or addressed inadequately and half-heartedly. There was, for example, recognition of the growing problem of pension affordability, with the retirement age raised to 68 in the mid-2030s, but quite simply this is inadequate - the pensionable age should be increased now to reflect longer life expectancy.

After several generally bad years, everyone will welcome the good news that the Statement contains. However we have good reasons to think that the medium-term prospects are not as rosy as the Chancellor thinks; there are a whole number of badly needed reforms that would lead to real growth that have not been made; and a series of long-term problems have still not been properly dealt with.

This article was originally published by the Huffington Post UK.

Given that the government's major objective in its 2010 Budget was to eliminate the government's structural budget deficit within five years, it is bad news that the structural deficit doesn't seem to be falling. As a cyclical recovery proceeds, it is true that the overall budget deficit is falling, but the structural deficit isn't. In my view we may be indulgent about the time slippage implied by the revised Plan A -- eliminating the structural deficit a few years later than originally forecast. If one accepts, as I do, that being undertaxed is not a major problem for the British economy, it would seem to follow that government overspending is. The implication is that cutting government spending hasn't gone nearly far enough. When you are virtually bankrupt, as the British government is, there may well be 'desirable' things that you simply can't afford. Is that concept too hard for politicians to understand? Or are they do dishonest and irresponsible that they just don't care? For example, both the British nuclear deterrent and the HS2 high speed rail lines are very expensive long-term projects that some people would probably continue to lust after even if their projected costs were to double in real terms. Nothing could do more for restoring a semblance of confidence in British government financial management than the immediate cancellation of these two unaffordable vanity projects. Obvious further targets would be state health provision and state schooling provision, both of which are becoming increasingly bad value for money.

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