Sunday, 29 November 2015

The UK economy: don't think the pain is all over

'With one bound, he was free': doubtless this is the way that George Osborne would like his recent Autumn Statement to be remembered. Taking advantage of some interest rate changes, some inflation rate rejigging and quite a lot of tax rises, the Chancellor (above) was able to say he was completely abolishing the Tax Credit changes that had always seemed so out-of-step with just about everything the Conservatives said about rewarding work. He was able to slow down quite a lot of the austerity that he had always threatened (or promised), and basically make everyone just a little bit less gloomy about the prospects for public services over the next few years. He cancelled any plans to cut police spending. He made sure he protected research spending in real terms for the rest of this Parliament (quite important if you, ahem, work in a university). And so on.

So there were all sorts of headlines along the lines of 'the end of austerity' and the like, as if all the bad times were behind us. No-one should be quite so foolhardy or so quick to accept the Government's line. All Budgets, and all financial packages, have a habit of coming unstuck a little way down the line, as some of the losers begin to speak up alongside the winners. And very few announcements from this most political of Chancellors can be taken exactly on trust.

So it's true that the spending pattern now looks a bit flatter. It looked ridiculous before the General Election, like a hockey stick with a whopping great load of front-loaded cuts at the start of this Parliament, and then some hefty spending increases at the end, when Mr Osborne will want to be pleasing voters rather than poking them in the eye. It looked a little bit more sensible after his post-election summer Budget. Now it looks even better, with basically flat cash spending by the end of the Parliament and only a much shallower dip in the middle.

So far, so good? Job done? Well, not really. For the pain is still going to be very, well, painful. We can't feel too sorry for buy-to-let landlords (who will be subject to higher stamp duty on their property purchases), since there's probably quite a lot of slack in a sector that could do with having some of the energy and heat taken out of it. Though Mr Osborne's repeated tax raids on the top ten per cent of earners are an interesting phenomenon, considering he is a Conservative Chancellor after all, that subject will have to wait for another day. Nor should raising an Apprenticeship Levy (basically another tax on companies) be necessarily unwelcome, since there's no reason why all those costs should necessarily rest with the Exchequer.

The real problem hits us once we look at what's still got to happen for Mr Osborne's targets to be met. He's left himself very little wriggle room, because he's basically banked much of the extra cash that the Office for Budget Responsibility told him he had left over. Understandable, though he should never have got himself into the stupid bind of cutting Tax Credits anyway - a deeply self-destructive penalty for Britons trying to move off welfare into work, as this administration is always hectoring people to do.

Still, some of the assumptions made about spending in the Autumn Statement look frankly incredible. Is the National Health Service really going to cope while having its funding fall every single year (as a share of the national economy), when on that measure it has only ever known increases? Can it really meet the so-called 'efficiency savings' that Mr Osborne has ordered, when it's been coming up with those for over half a decade already? We doubt it. Will people in the low- to middle-income brackets be able to buy anywhere to live when 'social housing' has basically been shrunk to the idea of subsiding expensive housing, and by only a very little? Probably not. Should students' loan interest rates really have been changed after they had entered into what looks very much like a contract with Her Majesty's Government? Any sensible economist or public policy analyst should be opposed to such post hoc changes as well, for they destabilise and undermine trust in the direction of any and all such policies that the British Government may announce in future.

And when we come to those low-paid workers that Mr Osborne says he is so keen to help out, don't think that the pain is over for them either. Tax credits cuts have been cancelled, but Universal Credit changes will cause nearly as much hardship - to similar groups of people - when they come into effect later in the Parliament. Now, the effect will be mitigated by the fact that wages will have risen by then, and that the Government's so-called National Living Wage will be due; and only new, rather than existing, claimants, will be hit. And no-one believes that Universal Credit will ever really work as Whitehall says it will, barring a few showoff examples. Mr Osborne can also afford to wait and see how the economy goes before turning his attention to Universal Credit, when he will probably reduce or even cancel the whole idea of his £12bn 'welfare savings'. Even so, the distributional changes by the end of this Parliament are not all that different to what they looked like before the Chancellor stood up and made his Autumn Statement - yet another smoke and mirrors act that should have seen him humiliated, were the official Opposition Labour Party anything other than a joke at the moment. An Opposition that's still to get its act together on a proper long-form press release on the Statement, by the way.

In any case, you'll have seen lots of headlines implying that we should all run out and dance in the streets. That economic summer is round the corner. Well, no. The cuts now look rather more like those that Ed Miliband and Ed Balls contemplated (they still go rather deeper). But if you're a student running up large debts, if you need the NHS, and still more if you rely on local government services that will will now have to shrink very rapidly (partly because the Government can turn the blame on them when people complain), things are still going to be very, very, very grim.

The depth of our economic winter is relaxing its grip - a little. Spring is still some way off.

1 comment:

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