I’m afraid there is no money. Those six little words have shaped George Osborne’s stewardship of the economy for the past five years, and, as Wednesday’s autumn statement will show, they continue to shape it.
Sure, the highlight will be an extra £2bn a year for the NHS, needed both to stave off crisis and provide the Conservative party with some political cover where it is weakest. The extra cash, however, will be paid for by savings elsewhere in Whitehall.
For Osborne, the six word admission by the outgoing chief secretary to the Treasury, Liam Byrne, that Labour was leaving office in 2010 with Britain skint has proved both a boon and a curse: a boon because it has allowed the coalition to blame Gordon Brown and his ministers for a parliament of austerity and uninterrupted falls in living standards; a curse because the repair job on the public finances has proved a lot more difficult than Osborne envisaged.
By now, he was expecting to be in a position to provide some pre-election sweeteners rather than having to cobble together some extra cash for the health service. Wednesday will be the political equivalent of the family rummaging around down the back of the sofa looking for some loose change to feed the electricity meter.
Despite repeated boasts that his plan is working, the chancellor has not kept his promises. The budget deficit will be almost £100bn this year and is rising. It was supposed to be below £40bn. If the current Treasury chief secretary, Danny Alexander, is foolish enough to leave a little note for his successor, he will only need to insert one word into the one penned by Byrne: still.
Two factors explain the borrowing overshoot. Britain currently enjoys the sort of growth rate that Germany, France and Italy can only dream about. The economy should expand by 3% this year, making the UK the fastest growing G7 nation. Jobs are being created at a record rate, a development that explains why Britain is proving a magnet for migrants from the rest of the EU.
It took until 2013, however, for the level of output to get back to its pre-recession level, the slowest recovery of the post-second world war era. Osborne thought the economy would cope with austerity better than it did. He underestimated the impact of higher VAT and cuts in spending on growth. The chancellor thought his tough deficit reduction plan would boost growth by generating more confidence in the private sector that the books were being balanced.
He was wrong. The upshot was weaker growth, lower than expected tax revenues and higher than expected borrowing. Half way through the coalition’s term in office, Osborne abandoned the idea of sorting the deficit in one parliament, and reverted to a more modest plan akin to that drawn up by his predecessor, Alistair Darling.
The past two years have seen much faster growth. Lord Digby Jones, the former director general of the CBI, says businesses are more optimistic than they have been for many years. Firms are attracted to Britain by the lure of lower corporation tax and tax breaks for R&D. Osborne deserves a “pat on the back” for his pro-business and pro-wealth creation approach, Jones says. “We’ve got low inflation, record low interest rates, falling unemployment and rapid growth.”
Unfortunately for the chancellor none of this is leading to progress in reducing the deficit, which is 6% higher in the first seven months of the current financial year than it was in 2013-14. Plenty of jobs have been created but most of them do not pay all that well. Many of the people classified as self-employed are scratching a living. A flagship coalition policy has been to raise the tax-free personal allowance to £10,000, but with so many workers on the minimum wage or not much more, one of its side-effects has been to reduce receipts for the exchequer.
As the Joseph Rowntree Foundation puts it: “The labour market has changed significantly in the last ten years. There has been a vast increase in insecure work - zero hour contracts, part-time work and low-paid self-employment, which means that getting a job does not necessarily mean getting out of poverty”.
The foundation notes that two-thirds of people who have moved from unemployment into work in the last year are paid below the living wage, the average self-employed person earns 13% less than they did five years ago and there are around 1.4m contracts not guaranteeing a minimum hours. Over half of them are in the lower-paying food, accommodation, retail and administrative sectors.
Frances O’Grady, the general secretary of the TUC, says the coalition only has itself to blame. “From the point of view of working people this government has meant rubbish living standards, falling real pay, higher dependency on credit and the creation of a lot of bad jobs. There have been cuts in benefits, cuts in jobs, cut in pensions and cuts in wages. It has not been a good performance.”
Paul Johnson, the director of the Institute for Fiscal Studies, says the chancellor has been more pragmatist than ideologue. “Osborne has been hugely more flexible than is often realised. He set out to have sorted the deficit by this stage, but as the economic news has got worse he hasn’t increased taxes or reduced spending by more in order to balance the budget by now. He has pushed balancing the budget back into the next parliament.
“The fiscal position is not good. In the first two and a half years we had dreadful growth. Since then the shape of growth has not been helpful.”
If it is taking longer than expected to knock the budget deficit back into shape, the same can be said of Osborne’s other objective - to boost exports from a re-invigorated manufacturing sector so that Britain once again pays its way in the world.
Just like his predecessors, Osborne has found that curing the deep-seated structural problems of the economy is harder than it looks. Despite a 30% fall in the value of the pound between 2007 and 2009, export performance has been poor. The focus on the budget deficit has diverted attention from a growing balance of payments deficit. The shortfall on the current account in 2013 was 4.2% of national output. It has only once been bigger since the second world war.
Terry Scuoler, the director general of the manufacturers’ association EEF, said: “Recovery is still a work in progress. Can anyone claim that the UK has rebalanced and that the march of the makers has contributed? No, I wouldn’t want to claim that at this stage.”
Like Jones, Scuoler advocates lower corporate taxes, tax breaks for R&D, the ringfencing of the science budget and the new catapult centres, which are technology hubs where businesses, scientists and engineers work together.
“Our trade deficit in goods is knocking on the door of £100bn a year. I quote that figure with some degree of sadness,” he said. “Much of our manufacturing capacity was hollowed out in the 1970s and 1980s. We are struggling with a lack of horsepower under the bonnet.”
There will be fresh attempts to boost the supply side of the economy on Wednesday. There will be a £15bn package to improve roads and Osborne is keen to press ahead with his plans for a Northern powerhouse. Long-standing weaknesses in skills will be highlighted. The fact is though, the recovery has been about bricks and mortar rather than the chancellor’s march of the makers. It was only when the Bank of England provided incentives for banks to increase mortgage lending and the Treasury subsidised house buying that the economy took off.
Mathew Oakeshott, the chairman of pension fund managers OLIM Property and a former Lib Dem Treasury spokesman, said: “It reminds me of the end of the Barber and Lawson booms, which were based on easy credit, rising house prices and debt-fuelled consumption. Meanwhile, investment stagnated and the balance of payments went through the floor. The big difference is that we haven’t got inflation.”
Osborne remains hopeful that the government’s commanding opinion poll lead for economic competence will still prove decisive on election day. His had hoped that by this stage living standards would be rising and the public finances strong enough to essay a few tax cuts, served up as the appetiser for the main course in the next parliament. Events have forced him to fall back on a less compelling pitch - the economy will be fine unless Labour is allowed to spoil it.
Ed Balls, the shadow chancellor, said: “I am not that bothered about being behind on economic competence. In opposition, we are always behind on economic competence. Brown and Blair were at this point before the 1997 election.
“I would rather we were further ahead in the polls but the Tories are leaving it a bit late for a feelgood surge. That’s why Cameron is talking about red lights flashing on the dashboard. Maybe he thinks he can scare people into voting Tory.”
Time is now running out fast for Osborne. Brown used to tell a joke about how he was handed three envelopes written by a predecessor when he became chancellor, with the instruction to open them in times of crisis. The first letter says “blame your opponents”. Osborne has done that with relish, but it has not made the Conservatives any more popular. The second says “blame the statistics”. Osborne’s “we are being buffeted by the global economy ” is a variant of that. That hasn’t worked either.
Time, then, for the third. Its message? “Prepare three envelopes.”
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