The Autumn Statement is a curious ritual. With the chancellor already delivering an annual budget based around a medium-term strategy, the autumn statement does not provide an opportunity for any major new announcements.
Still, in this statement, George Osborne had the pleasant experience of announcing upward revisions to previous forecasts. Growth should be higher than expected this year and next – and forecasts of unemployment and the budget deficit have been revised downwards.
But much of the interesting material, as often, is buried in the detail of the statements and forecasts. As partially acknowledged by the chancellor today, underneath the initial positive signs are some more worrying developments.
The Office for National Statistics (ONS) has revised its assessment of the impact of the great recession. The ONS now says the UK economy shrank by 7.2% from peak to trough, more than the 6.2% previously estimated. Against this backdrop, the upward revisions to expected growth rates are welcome.
Nevertheless, forecasts for growth between 2015 and 2017 have actually been revised downwards slightly since their March 2013 Budget forecast. Growth during this period is projected to be in the 2.2-2.7% range, around the UK long-run average, even as the economy is still recovering from a major recession. This growth rate is still, as the chancellor was keen to point out, stronger than other major economies’.
Reducing the budget deficit remains central to the chancellor’s aims. Over time he hopes this will in turn lead to the outstanding debt burden decreasing as a proportion of national income. On his forecasts, the UK will run a budget surplus by 2019, with debt peaking as a proportion of national income in 2015/16. This is clearly later than originally intended by the government, and the chancellor acknowledges that growth itself is insufficient to deal with the UK’s structural budget deficit.
To this end, Osborne announced further cuts to welfare and other departmental budgets. But with budgets for health, education and overseas aid effectively ring-fenced, room for manoeuvre remains very limited.
For instance, the major pre-announced innovation in the chancellor’s statement was the projected rise in the state pension age. However, this is an attempt to control the future growth of pension benefits, not current growth. With an announced £2.95 per week increase in the basic state pension and other pension benefits left untouched, this aspect of the welfare budget has not faced cutbacks.
In effect, the current government’s strategy of focusing on the fiscal position has been designed to ensure low interest rates. The Bank of England has maintained a low rate since the start of the crisis and supplemented this with quantitative easing.
The Office for Budget Responsibility (OBR) forecasts a rise in interest rates next year and thereafter; it cannot be effectively zero forever. If unemployment does continue to fall in line with forecasts, then this will clearly bring it below the 7% level that the Bank of England governor Mark Carney has announced must be reached before rates can be raised. The chancellor’s strategy still rests on interest rates being maintained at a low level; forecasts for growth and the evolution of the debt still assume interest rates that are low by historic standards.
Worrying trends lurk behind these forecasts. The chancellor stated that the government was pursuing a long-term plan to deliver a “responsible recovery”. But so far, the economy has not been rebalanced as the government and others would have wished: business investment fell in 2012-13 and the forecasts for it to rise in future years hinge on exceptional growth rates rarely exhibited by the UK economy. Bank lending to businesses remains particularly weak.
The chancellor noted the weak productivity performance of the UK economy. Investment in education and training may help this over medium term, but investment in new technology is needed in the long run. Exports have not contributed to the current recovery and are not forecast to do so, despite a cheaper pound. British exports remain oriented towards the slow-growing markets of Europe and North America, with the major emerging markets of the BRICs only accounting for 7% of UK exports.
Instead, private consumption has picked up again. Household savings rates had risen initially in the recession as people attempted to consolidate their debts, but they have started to fall again as house prices pick up (and are expected to rise faster). A number of measures to increase the supply of housing stock were tried, but these are now not expected to temper house price inflation. The Autumn Statement report takes some issue with claims of a squeeze on living standards over recent years, but the OBR projections still have average earnings running behind (or no faster than) price rises.
Ultimately, despite a seemingly hopeful overall picture, the detail of the Autumn Statement reflects the underlying weaknesses of the UK economy: low investment, large sections of the workforce under skilled, and weak exports. In places this was acknowledged by the Chancellor – but his own projections indicate that he has only limited confidence in our attempts to tackle these longstanding problems.