Hamish McRae: When unravelling the Budget, focus on the economic and public finance figures
Economic View: The 320 pages of the 2007 Budget turned out to be almost complete rubbish
Sunday 18 March 2012
It is, I am afraid, Budget time again. So on Wednesday we will be subject to the annual deluge of statistics, analysis, politics, criticism and self-congratulation – and most of it will, five years from now, seem irrelevant or wrong. As an antidote to all this I thought I had better look back at the Budget of five years ago and see what it said. It was called "Building Britain's long-term future: Prosperity and fairness for families".
On the opening lines the document declared that the Budget "shows that the economy is stable and growing and that the Government is meeting its strict fiscal rules for the public finances". It predicted that there would be a small surplus on the current budget right through to 2011 and that UK national debt would remain below 39 per cent of GDP during this time.
The economy was predicted by the Treasury to grow at between 2.75 and 3.25 per cent in 2007, 2.5 and 3 per cent in 2008 and 2009. What actually happened was that the national debt more than doubled to 84 per cent of GDP last year on the Maastricht definition, a little less on the Treasury's calculations. As for growth – well we all know what happened next, the deepest recession since the Second World War.
Why waste time looking backwards? Simply to remind us, as we look forwards, that the Budget of 2007 was a 320-page document that turned out to be, actually, almost complete rubbish. You see, there are really only two things that matter in Budgets: what is really happening to the economy; and what is really happening to public finances. A word about each, just to help all of us calibrate the stuff that will come out on Wednesday.
On growth, it is worth saying again and again that the present data will be revised upwards, but that we will not know by how much for two or three years. The revisions to the 2007 data published last November show that the peak of output was a full percentage point higher than was estimated even a year earlier, that the recession ended three months earlier than reported, and that output in the middle of last year was half a percentage point higher than previously thought. That is all in the so-called Blue Book, which shows full national accounts, published once a year. I expect further upward revisions this November, and more after that.
Unfortunately, the Office for Budget Responsibility (OBR) has to work with the data that it has got. Intuitively, it feels as though there was, indeed, some sort of pause in growth last summer, but growth resumed in the final quarter of the year. But that is not what the official figures, at the moment, say.
And now? I would love to be able to be confident that growth is picking up, and I hope it will later this year, but the evidence is not really there – or at least not yet. We are not going back into recession, notwithstanding what is happening to much of the eurozone, and there are some cheering things coming through, such as the small increase in overall employment, though that is entirely the result of more part-time jobs. But until inflation comes down, we are all too squeezed to be able to bump up growth by spending more.
So, look at the OBR's growth forecasts with a cautious eye and, in particular, pay attention to the nuances in anything it says. It is run by clever and honourable people, and though they are subject to the same errors of judgement as the rest of us, what they say deserves much more attention than the views of what was an over-politicised Treasury back in 2007.
On the public finances, the key number will be the deficit for the current year. There is still a month to go this financial year and we will get an update on the first 11 months of it and a decent estimate for the final month.
Unlike growth figures, revenue and spending ones are hard. You can count how much money is collected and how much you are spending because the money comes into a bank account and it goes out of a bank account. True, there will be adjustments for a few months as late payments come in and late spending goes out, but revisions are small in relation to the huge sums involved.
The thing to look for will be revenue. Spending we know is coming down, though the Government is still borrowing more than £2bn every week to cover the gap. But revenue has been pretty good over the past few months, with one exception. That exception is self-assessed personal income tax, which the January figures suggest is very soft. That in turn suggests that the increase in top tax rates has been losing the government revenue, rather than increasing it. We will get some estimates of that and presumably some idea of what the coalition will do. That will hit the headlines, but it should not divert attention from the fact that overall revenues have been rather good.
Indeed – and I find this really interesting – the strength of tax revenue would confirm my intuitive feeling that the growth figures understate what is happening to the real economy. In the past in the early stages of a recovery the UK economy has always pumped out strong tax revenues. This seems to be happening again.
That brings us to the core issue: how much progress has been made on closing the budget gap? The graph above showing spending and revenues as a percentage of GDP will be updated by the OBR. The projections here are ones made by Goldman Sachs and while they are a little more optimistic than the last set done by the OBR, they feel about right.
The big message, as before, is that the Government has not been able to sustain a tax take of more than 37-38 per cent of GDP for the past 25 years and spending has to reflect that. Unless you believe that the electorate is willing to pay more tax than at any stage for a generation, there is no more money.
So this Government, like the electorate, has to do more with less. Let's see how far the Budget papers hammer home that reality.
German forecasters' very British eurozone response: Let's hope it 'muddles through'
So what happens next for Greece and the other distressed eurozone economies? The new report on the European economy produced by CESifo, the group of forecasters based in Munich, has an excellent analysis of the pressures on the fringe. Its president Hans-Werner Sinn was in London last week talking about these pressures.
He made three core points.
The first was that the total bail-out support for Greece was even larger than the headline numbers being quoted. Not only were there the two official support packages and the €107bn "haircut" imposed on the private bondholders, there were the funds circulated through the central banking system, the so-called target funds, that enabled Greece to run a persistent current account deficit yet still have enough euros to pay for these imports. So the total support was several times Greek GDP.
Sinn's second point was that all the distressed economies were being supported by these balances, with the result that the European Central Bank was providing back-door financing in a way that had never been intended when the euro-system was devised. Should Greece or the other weak eurozone countries dump the euro, that would leave the remaining shareholders in the ECB with hundreds of billions of further debts.
And the third point was the scale of devaluation that Greece, Portugal, Spain and also Italy would in theory need to get them back to the competitive position they held in 1995. The answer was around 30 per cent. But since they obviously cannot devalue and remain in the euro, that means they have to cut money wages and prices by that amount.
That will, to put it mildly, be difficult. Perhaps understandably, the report shies away from the obvious conclusion: they have to leave the euro. Instead, it hopes the eurozone will "muddle through". Sounds rather British, that.
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