George Osborne made a typically robust defence of his economic record in the last Autumn Statement of this Parliament. Some of the measures he announced may well pay electoral dividends. Although the amounts involved are relatively small, the reduction of Air Passenger Duty for children and the revision of stamp duty in England will no doubt shore up support in the Conservative heartlands.
Yet the economic judgement on the Coalition’s economic record is likely to be harsher than the political assessment. True, the UK economy has outgrown most European economies in 2014. But its overall performance since the last election has been less rosy. Over the whole Parliament, UK growth has been slower than the US, Ireland, Canada, Australia and New Zealand. One key achievement has been not to get embroiled in the Eurozone catastrophe, but credit for this must go to the previous government rather than the current one.
In his 2010 Budget Speech, the Chancellor argued that “Our policy is to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export.” On all of these criteria, the facts suggest that the objectives have either not been achieved at all, or very partially. Many of these facts are evident in the latest Office of Budget Responsibility forecast.
The trade performance has been anaemic since 2009. Increased exports have made no net contribution to growth. The trade balance is not expected to improve much before 2019. And the main contribution to UK GDP growth has come, as is often the case, from consumer spending. It is difficult to claim that the UK economy has been substantially rebalanced given that two thirds of the growth in GDP comes from increased high street spending. The inevitable consequence is rising household debt, with the OBR’s December forecast of 173 per cent of GDP in 2018 rising to 172 per cent in the OBR’s latest pronouncement. Huge angst is generated by public sector debt approaching 80 per cent of GDP, while the fact that household debt is more than double this level passes almost unremarked in the topsy-turvy world of politics.
And on public sector debt, the ambitions of 2010 have not been realised. The OBR forecast, based on the Government’s fiscal plans, was that the deficit would be down to 2.1 per cent of GDP in 2014-15. The outcome looks likely to be around 5 per cent, more than double the initial estimate. The government can claim that it has halved the deficit, but it has substantially failed to meet its own objectives.
The main cause of the failure to meet borrowing targets has been the weakness of tax revenues. In turn these reflect the massive changes that have been happening in the UK labour market. There has been massive growth in the number of low-paid jobs, while workers’ real wages have been falling. Not surprisingly, the Chancellor has had little tax dividend from the extra jobs.
The OBR has finally figured out that earnings growth has been much weaker than it had expected, and slashed its forecast. The consequence is that income tax revenue is now expected to be £52.9bn less than its March forecast for the period to 2018-19, making the reduction in the deficit even more difficult to achieve. Hence the further savage cuts in public services that are implicit, but not really discussed, in the last Autumn Statement of this Parliament.