Ignore George Osborne’s hollow boasting – thankfully, better things are happening at the Bank of England

How will retired folk behave with more control over their finances?

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The Chancellor opened his Budget speech in the House of Commons last Wednesday as follows: “I can report today that the economy is continuing to recover – and recovering faster than forecast. We set out our plan. And together with the British people, we held our nerve. We’re putting Britain right.”

The question for us to consider here is whether that is true. Let’s not forget that Mr Osborne lost the much-hallowed, but still not restored AAA credit rating that he told everyone in 2010 was a central plank of his plan. So to cut through all the hyperbole and taunting, I want to put this all in context.

I present a little evidence on GDP per capita in the first chart. This is up from £5,971 in Q2 2010, when the Coalition took office, to £5,997 per quarter in Q3 2013, which is the latest data we have. So GDP per person living in the UK rose by 0.4 per cent in total over these 14 quarters, or by an average of 0.028 per cent a quarter. This compares with an average growth of 0.71 per cent a quarter over the 41 quarters from Q1 1998-Q1 2008 under Labour. So growth under Labour was 25 times higher than under Mr Osborne. Real GDP per capita remains 6.4 per cent below its level in Q1 2008, which inevitably will not be restored before the May 2015 election.

So much for all the claims of victory; the war has been lost.

Even though there has been a modicum of growth in output over the last few quarters there has been no feel-good factor. The reason is that output is being spread over a bigger population. The second chart shows the rapid growth in the population since 2004, when 10 mainly eastern and central European countries joined the European Union. Population growth in the UK since 2005 (0.59 per cent a year) is now back to the levels it was when the baby boomers were having kids in the Sixties (0.66 per cent a year) and approximately double the rate in the 1990s (0.29 per cent).

In 2012 we had the Omnishambles Budget. This time around we had the Bingo and Beer Budget (BBB), named for the disastrous tweet by the Tory party chairman, Grant Shapps, “to help hardworking people do more of the things they enjoy”. This went viral on Twitter and was a public relations disaster.

A big part of the BBB was the freeing up of pensions that Mr Osborne claimed would assist with savings. However the OBR is forecasting the opposite, that the savings rate will plummet from 7.2 per cent in 2012 to 4.2 per cent in 2015 and to 3.2 by 2018.

The concern is that there was no consultation on these changes and the behavioural consequences are unclear, which means their impact on the public finances remains uncertain. How will retired folk behave with more control over their finances? Mr Osborne has provided us with no analysis or studies on likely responses.

Paul Johnson of the Institute for Fiscal Studies was critical of the fact that Mr Osborne was “implementing a set of definite and permanent tax cuts that look to have been matched by more unspecified spending cuts, some changes in the timing of tax receipts, and our old friend tax avoidance measures”. He went on to claim that “the liberalisation of pension rules is expected to lead to more tax revenue over the next few years. But that depends on highly uncertain behavioural assumptions about when people take the money”.

He concluded that it was “a Budget which leaves us with as little sense as we had before of quite how the very large public spending cuts still in the pipeline will actually be delivered … Without wanting to be seen as patronising, it is important to point out that increased choice could lead to more mistakes. People at 60 or 65 are known to underestimate their own life expectancy, and especially the likelihood of living to extreme old age. They may overspend early in retirement.”

Conclusion on the BBB? Same old same old: we are doing great, all is well, it was Labour’s fault and we’ve got to keep on doing the same stuff, vote Tory. But it isn’t fine, as the economy has flatlined over nearly four years. So not impressed, although I did like the reduction in the employer national insurance contributions for youngsters under 21.

Then there was all that stuff at the Bank of England where Mark Carney has wielded the big broom. In this column on 13 June 2013, just after Mark Carney was appointed, I argued that “the expectations are high, but it is going to be hard for Mr Carney … to deliver very quickly as the Old Lady of Threadneedle Street moves even slower than a massive, Capesize cargo vessel” and will “have to sweep clean at the top”.

Nine months later and bingo. A new, highly qualified deputy governor, Nemat “Minouche” Shafik, looks a truly fantastic addition. She has an incredibly impressive CV with a Masters degree in economics from LSE and a PhD from Oxford, with periods as an academic at Wharton and Georgetown. She was deputy managing director at the  International Monetary Fund, and before that spent three years as Permanent Secretary at the Department for International Development, as well as a spell at the World Bank. I bet it didn’t take the interview committee long to work out she should get the job; the best candidate and a woman besides. Nice one.

In addition I thoroughly welcome the appointment of the smart and original-thinking Andy Haldane in the job of chief economist, with enhanced powers across the Bank. By the summer there will not be a single member of the 2008 Monetary Policy Committee who wouldn’t listen to me and missed the Big One, the once in a hundred years Great Recession. Sitting in America it wasn’t hard at all to see it coming across the Atlantic. Thankfully they are all gone. Better to be lucky than good, but Mr Carney seems to be both lucky and good.

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