Which way will the US turn over the fiscal cliff? The key question about George Osborne's Autumn Statement is one the Chancellor can't answer

Our Chief Economics Commentator sets the scene for this week's statement

Share
Related Topics

How fast should you cut? We will shortly be preoccupied by the Autumn Statement, or as Labour used to call it, the pre-Budget report. But – and I mean no disrespect to our Chancellor – whatever he does or does not do will make only a marginal difference to the British economy over the next three years, and just about zero to the world economy. It matters politically and it matters to us personally, but that is different.

By contrast, what the US does to its budget matters very much, and once the hubbub here dies away, the focus will I think shift to the US where the “fiscal cliff” looms. So let’s for the moment think about the rather larger stage over there.

The cliff is the automatic tightening of fiscal policy that happens, in the absence of Congress passing legislation to stop it, at the end of the year. The cuts in spending and the increases in taxation are equivalent to 4 to 5 per cent of GDP. It would be almost as though we here were doing our five-year squeeze in one fell swoop. But were it to happen, the shock would I think lead to some accommodation in Congress in January that would soften the blow.

Both sides accept that there has to be some sort of deal, one that would trade higher taxes (which the Democrats stress the need for) with lower public spending (which the Republicans want). The question is over the balance. The more likely outcome is that there will be some sort of temporary deal in the next couple of weeks. This would pave the way for a more substantive agreement in the spring, which would be a sensible way to do it.

The problem with the US tax system is that it does not raise very much revenue as a proportion of GDP compared with most Western democracies, but it has quite serious distorting effects on people’s behaviour. It is too complicated, and combines quite high nominal rates of taxation with too many loopholes.

Take even the basic income tax rate. The top take notionally is 35 per cent, which may not sound that high to us. But you have to add state income tax, the top rate of which could be as high as 9 per cent. So, rich Americans face nominal rates similar to those of Europeans – they just have more loopholes.

There are two questions, then. One will be whether the deal will show a credible path towards a balanced budget. In other words, at what speed will the US restore fiscal discipline? The other is whether the country will end up with a better designed tax structure.

The first matters a lot to the rest of the world. The US will account for roughly one-third of the incremental demand added to the world next year. So if growth were halved by a botched fiscal deal that would deal a real blow to global demand, which we would feel here. But if Congress were to reach agreement for a five-year plan to balance the budget, it is possible that the boost to domestic confidence would more than offset the mechanical hit to demand from fiscal tightening. Instead of the country growing at the 2 per cent generally expected, it could end up picking up some pace.

The second matters more to the US itself. Its domestic market is so huge that it can, to some extent, get away with a poor tax system. But one effect has been for American companies to move activities, make profits, and hold cash balances offshore – and not just in the tax havens that we’ve been hearing so much about. Another effect has been to exacerbate inequalities in the US itself, as wealthy individuals can minimise their tax payments by using the loopholes that the system has deliberately created. Whether Congress has the ability to reach agreement on substantive reforms is another matter, but if it does, that would have knock-on effects on the rest of us.

Watch out for the detail, not the politics

So what should we look for today from Mr Osborne? The headlines will be about the effort to get more money out of higher earners, the Coalition’s “growth strategy”, the holding off of fuel duties and so on.

This is mostly about politics. But I would focus on two other areas. The first is the Office for Budget Responsibility’s economic forecasts and, in particular, anything that goes any way to resolving the puzzle as to why this recovery has been by far the best in terms of employment compared with the early 1980s and early 1990s, but by far the worst in nominal GDP growth. The second area will be the detail of the deficit. Where are tax revenues falling short? Where does the Government plan to cut spending?

Remember to ignore the transfer of the Post Office pension fund assets to the Treasury and the transfer of the interest paid to the Bank of England’s holdings of gilts. There are different views about the sleight of hand here, for they make the numbers look better but change nothing. And remember this number: £120bn. That’s what Britain has to borrow this year. The deficit-cutting programme has only just begun.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper

£23000 - £26000 per annum: Recruitment Genius: This small, friendly, proactive...

Recruitment Genius: Photographic Event Crew

£14500 - £22800 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Software Developers - .NET / ASP.NET / WebAPI / JavaScript

Negotiable: Recruitment Genius: A Software Developer is required to join a lea...

Austen Lloyd: Corporate Tax Solicitor - City

Excellent Salary: Austen Lloyd: A first rate opportunity to join a top ranking...

Day In a Page

Read Next
 

After Savile, we must devote our energies to stopping child abuse taking place right now

Mary Dejevsky
A ‘hugely irritated’ Sir Malcolm Rifkind on his way home from Parliament on Monday  

Before rushing to criticise Malcolm Rifkind, do you know how much being an MP can cost?

Isabel Hardman
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower