It is a glimmer of sunlight on the horizon. For the first time since he came into office, the Chancellor was able to announce figures both for the economy and for public finances that were a little better than the previous batch.
The growth outlook is particularly encouraging – and about time too, you might think, given how far we have to go. But the fiscal numbers remain alarming. We may at the moment have the fastest growth of the large developed economies (with the possible exception of the US), but the Government is still raising only £6 for every £7 it spends. The revenue this year is projected at £619bn; spending £718bn. We desperately need growth to close that gap.
We are getting some now. There are, however, two questions. One is whether we are getting the wrong sort of growth – led by consumption and fuelled by an unsustainable (and socially undesirable) borrowing binge. The strong, maybe too strong, housing market is part of that. The other is a long-term question as to whether the country will grow at about its underlying natural growth rate of some 2.5 per cent, or whether it can grow quite a bit faster. How much of the ground lost as a result of the recession can be regained?
On the first, the common sense answer is that the balance of growth is not ideal but given the uncertainties in the rest of the world, we can hardly be picky. It ought to broaden out, as business confidence increases and export markets improve.
On the longer-term outlook, we simply don’t know. In the past, growth lost in recessions has eventually been recouped, but even if that does happen this time it could take many years. The faster it does, the faster we get back to the living standards of the peak of 2007/8 – but at the moment we cannot sensibly predict when.
We can predict, or at least the Office for Budget Responsibility has predicted, when we will get back to a budget surplus. It is 2018/19. Given the inaccuracy of previous forecasts, this should be read with caution, but the point is made that at some stage we have to get back to a budget surplus. We have to have a cushion before the next global regression strikes.
Meanwhile, the interest cost of our past borrowing rises. Even with the present low interest rates it is £50bn this year, and it is projected to climb to £77bn in 2018/19. Since the end of the 1980s, tax revenues have been stuck at 37-38 per cent of GDP – they were higher in the 1980s, but that was a result of the boom in North Sea oil and gas revenues. That 38 per cent is the money any government has to work with. But since it cannot cut spending to a significant extent, it has to wait for the economy to grow and revenues to catch up with spending. That was the core of the message George Osborne sought to convey yesterday. We all need growth to increase employment and rebuild living standards; the Treasury needs it to balance the books.
Maybe we want balanced books too. Aside from the somewhat better numbers, the new element in the Autumn Statement was that the Charter for Budget Responsibility should be put to Parliament before the general election. It is politics of course. But it picks up the theme first developed by Gordon Brown when he became Chancellor in 1997: that a government should have its hands tied. His golden rule was that a government should over the economic cycle only borrow for investment, not for current spending. We now know that failed, because he broke his own rule, but in the early years it was a useful discipline. “Prudence with a purpose” enabled him to run a budget surplus.
George Osborne did not use that expression yesterday, of course, but the tone he adopted was reminiscent of the early years of Brown. (To be unkind, you could say that the tone of Ed Balls’ response was late Brown). Osborne stressed we were making more progress on cutting the deficit than most other countries. He stressed the need for a surplus. And he noted the new data showing the recession was even deeper than previously reported, just as Brown in 1997 stressed the failure of previous governments to give the country macro-economic stability: Tory boom and bust.
If you want to see the whisky bottle as half-full, this is all quite encouraging. We will, one way or another, get governments that deliver fiscal responsibility in a way that both major parties have failed to in the past. If you prefer to see it as half-empty, we still have another four or five years before the nation’s finances will be fully under control – and we need solid growth through that period to get there.