It was always going to come to this. Slashing public spending especially investment and talking the economy down when the recovery was still fragile was always going to be contractionary.
Our part-time Chancellor continues to put his head in the sand by sticking to his failed fiscal consolidation plans; in the House of Commons in his Autumn Statement he once again claimed “the economy is healing” and his economic plans are “on the right track”. What planet is he on? His comments will surely come back to haunt him as there seems little likelihood that much of anything will change given the measures were fiscally neutral: same old, same old. George Osborne made these ludicrous claims even though he had to admit he would not meet his self-imposed fiscal rule of reducing debt as a proportion of GDP by the end of this parliament. The 1 per cent cut in corporation tax is unlikely to be popular given the recent disquiet over big firms failing to pay tax in the UK.
The real cuts in benefits, especially to Job Seekers Allowance, will reduce consumption further as the poor have high marginal propensities to consume and will add to a growing sense of unfairness. Osborne’s only answer to Ed Balls’ critique was to turn to personal insults, which appears to be the Coalition response these days (I have been on the receiving end). They have no answer to the terrible data. The economy is not on the right track and is not healing but is shrinking. Long-term unemployment has nearly doubled over the last 18 months; the numbers claiming Job Seekers Allowance for more than a year has risen from 220,000 in June 2011 to 431,000 in October 2012.
Data from the latest PMIs for services, construction and manufacturing suggest the economy will also shrink in the fourth quarter of 2012. The total deficit has indeed come down by about a fifth in the year to September 2012, compared to the peak in the year to March 2010. But that was achieved by cutting public investment. Over the same period, investment has been halved while the current deficit fell by less than a tenth, has been rising slightly for over a year now.
The deficit is rising not falling. When the coalition took office the OBR predicted in its pre-Budget report in June 2010 the economy would have grown to this point by 6% but it has grown by 0.6%. Now the OBR is forecasting the economy will shrink over 2012 by -0.1%; the MPC also forecast negative growth in 2012, the implication is the UK is in triple-dip recession. The OBR forecasts growth of 1.2% in 2013 , 2% in 2014 and 2.3% in 2015, down from Budget forecast of 2.8%, 2.8% and 2.6%.
Even the British Chambers of Commerce criticised the OBR forecasts calling them more realistic but still ‘too ambitious” as they forecast 1.0% in 2013 and 1.8% in 2014. In a speech in March 2010 Osborne argued he intended to introduce a new economic model with a number of benchmarks, the first was to protect the AAA credit rating, which is now in jeopardy; the only question is when will we lose it? He also argued the British public should “hold us to account.” A YouGov/Sun poll claims the Labour Party holds a 14 point lead in the polls. Spin isn’t working as people are beginning to eat the data. Osborne must be held to account for his failures.