Some reflections on the Autumn Statement
December 12, 2012
Well, it was never supposed to be like this. The coalition’s expenditure programme for the entire parliament was designed to have been done and dusted in November 2010. Subsequent pre-Budget reports were expected to feature only the odd tweak here and there.
Last week’s Autumn Statement may have had the Westminster village agog with anticipation, but for three reasons it was met with supreme indifference by the large corporates and banks of my constituency. First, a recognition that any government in these acutely difficult times has virtually no room for manoeuvre. Secondly, despite all the continued fire and brimstone of the exchanges between Osborne and Balls, there is in fact vanishingly little to choose between their approaches to economic management. Indeed all the talk of ‘austerity’ and ‘savage cuts’ provides the coalition with the alibi to the markets that they have a deficit reduction plan that is being vigorously stuck to (not borne out by the economic facts) whilst Labour can take comfort in playing their familiar ‘heartless Tories’ card in drumming up support from swing voters, without having any plausible alternative.
Finally there is now near universal acceptance that the coalition’s strategy is to keep interest rates at near zero (as they have been for the past forty-five months) and hope that something turns up. I suspect Chancellor George Osborne’s tactical handling of the UK economy owes rather more than he might willingly admit to the Mr Micawber principle (about which I wrote a ConHome article earlier this year). After all, waiting for something to turn up is not always the ill advised course of action. The accretion of time often does alleviate, and sometimes even solves, what seems an intractably difficult situation.
The sobering truth, however, is that these ultra low interest rates mean that the UK economic patient remains in a government-induced coma and these historic low returns provide no incentive for prospective investors to take the plunge again in large-scale UK projects.
So what of the strategy for growth?
Essentially the Autumn Statement, via some financial engineering, has reinstated the erstwhile Labour administration’s capital programmes for schools and science, which were axed before the 2010 election.
The justification for this additional £5bn capital splurge (remember this amounts to less than 1% of GDP) is that there will be commensurate current account savings across Whitehall – I await to be convinced if these will ever happen as it will prove incredibly difficult for the coalition as we approach May 2015 to impose the necessary political will to execute the planned level of spending cuts. If they don’t, then there really is nothing to choose between Chancellor Osborne and would-be Chancellor Balls on the public spending issue.
Until now the coalition’s growth strategy – if you can really call it that – has been to rely on loose monetary policy in the forlorn hope that cheap money alone would encourage businesses and individuals to spend. But with little consumer or business confidence, and fears about employment security and rising household bills, there is scant evidence of new private sector spending. This ultra low interest rate policy has benefited banks who can continue to delay the crystallisation of bad debts, especially in the property sector. However the failure to create other forms of debt capital mean that hoarding cash has been the order of the day rather than investment by businesses and individuals alike.
Faltering demand has lain at the heart of the coalition’s failure to achieve growth over the first half of this parliament. The superficially more attractive paring back on procurement may be more politically palatable than cutting pay or sacking staff in the public sector. But it has come at a cost – further reduced demand. In short the Treasury implicitly recognises that the ‘wrong sort’ of spending cuts were targeted in the 2010 Spending Review and stealthily this Statement represented a reversal of policy.
To the Chancellor’s credit, however, he has resisted the superficially easy option of a ‘dash for growth’ of the type that his predecessor Anthony Barber unleashed precisely four decades ago.
I suspect the real danger will come if sluggish growth continues and even the OBR’s modest deficit-reduction projections for the years ahead turn out to be massively optimistic. The risk then is that the Treasury loses its nerve and allows a dose of inflation to take on the burden of paying down the effective public debt.
In the meantime, there is a continuing need to experiment in order to accumulate; we must innovate or suffer the consequences. Treasury orthodoxy is hostile to granting tax breaks and capital allowances which would bring a flood of ‘shovel ready’ investment into infrastructure projects. Yet it is unarguably preferable that we kick-start the construction industry today at a time of economic stagnation even if this somewhat reduces tax receipts from such projects in future years.
In the months ahead as the Eurozone crisis unfolds into a new stage, the UK also needs to drive home its ‘safe haven’ competitive advantage. Provided we talk less of rebalancing and make more of London’s unrivalled position as a centre for global finance, the UK stands well placed to benefit from the flight of Italian and Spanish capital. We ought to be ruthlessly targeting this money, but only if the Treasury makes the unreserved case for the City as an open, safe haven for such foreign investment can we hope to harness this flow of imported capital which could kickstart a fresh generation of infrastructure projects.
Needless to say, another government department that needs a sea change in its approach is BIS. Over recent years there has been much talk, but relatively little concrete action, over Export Guarantees, the lifeblood for medium sized enterprise breaking into new non-EU markets. The UK needs to exploit supply chain finance within the Eurozone and recognise the strengths of its position as a distribution hub. To be frank, we are well behind the French and German governments, which are often accused by British prospective exporters of unfairly promoting their own national exporters in new markets in Asia, Africa and South America. Now is not the time for orthodoxy and timidity in the export guarantee field: we need to integrate policies in this area and aggressively market that diminishing but still highly respected UK expertise at the top end of the value chain in the manufacturing sector. Inevitably some export guarantees will go sour, but that is the price any government must pay if we are to exploit the new export markets that will invigorate the UK’s traditional role as a global trading nation in the century that lies ahead.
The new conventional wisdom is that whilst the economic outlook to 2015 and beyond remains bleak, the politics for the Conservatives are a good deal more encouraging.
That may be right; indeed given there is so little to choose between the Chancellor and his Shadow, why not stick with coalition economics come the next General Election?
However, serial incompetence may prove its undoing. Even in the past month we have seen scathing independent reports detailing the costly failure of the coalition’s apprenticeship initiatives, the Work Programme and the West-Coast mainline fiasco. These unforced errors provide ample opportunity for the Opposition to undermine the very real achievement that the international bond markets are continuing to reassert their faith in the government’s determination to put this nation’s economy back on the right track.