The UK Chancellor, George Osborne, today delivered a later than usual Autumn Statement – his third since the Coalition government came to power promising to ‘clear up the economic mess’ left by the previous Labour government. In his first Autumn Statement in 2010, Mr Osborne promised a deficit reduction plan to ‘re-balance the economy’ by 2015, and created the OBR (Office for Budget Responsibility) to ensure that he, and future Chancellors, would be ‘responsible Chancellors’ and not tempted to burden the economy with unsustainable long term debt. The delayed announcement was partly to give time for the OBR to scrutinise Mr Osborne’s plan. Back in 2010 Mr Osborne created his own rule for fiscal control – namely that, as a % of GDP, total public debt should fall by 2015. Today, Mr Osborne had to accept that this rule was broken and total debt will continue to rise as a percentage of GDP until 2014. Given that the sale of 4G licenses appear in this year’s revenues, the ‘true’ level of structural borrowing has been temporarily obscured.
The ‘headline’ measure in the Statement is the expected squeeze on welfare benefits, which comprise around a third of total government spending. Many benefits have been capped to grow at just 1%, and with inflation consistently running at between 2 and 3%, those on both in-work and out-of-work benefits will experience a cut in real terms for several years. The OBR has indicated that the proposed changes to welfare benefits will save some £3.7bn by 2015-16.
The cause of Chancellor’s difficulty is that growth has been virtually non-existent since the 2010 Statement, meaning that tax revenues are weaker than expected, and spending on benefits higher than expected. Given that the growth outlook is bleak, Mr Osborne is asking for continued austerity until at least 2018. Indeed, the OBR is forecasting a GDP fall of 0.1% in the last quarter of 2012, pushing the economy into an historic triple-dip recession. The message from the Chancellor is that any talk of a Plan B is dead, and that the UK is ‘on the right track’ in its attempt to ‘balance its books’.
While the impact of the Autumn Statement is expected to be fiscally neutral the distribution of income is likely to widen as the better off (apart from the very richest 10%) gain at the expense of the poorest. The impact on working families is, in fact, likely to be greater than that on those who receive out-of-work benefits. Action groups have been quick to highlight the fact that poverty in general and child poverty in particular is as much a problem for the low paid as for the unemployed. Indeed, according to Alison Garnham, Chief Executive of Child Poverty action Group, “..working families are once again at the front of the queue for spending cuts. With 6 in 10 poor children living with a working parent, real terms cuts to tax credits, housing and child benefits are grim news..”
The expected supply-side benefits of these welfare cuts – namely, the incentive to come off benefits and actively seek work – are unlikely to have any appreciable effect during a prolonged recession. As previous noted, underemployment is slowly replacing unemployment as new jobs are more likely to be part-time than full-time, hence reducing any potential incentive effect. Clearly, the impact of austerity is not evenly felt. What the economy really needs is, of course, a good dose of above-trend growth, though it is hard to see exactly where this is going to come from – at least in the medium term. The announcement of a royal birth is, of course, a welcome ‘erratic’, to coin a statistical phrase, which is, of course, likely to lift the gloom just as the Olympic euphoria fades – but for now, with the first snow fall of winter on our doorstep, roll on Christmas – if, that is, you can afford one.