Philip Hammond doesn't want you to know that we might be heading towards another recession

We are in a similar position to most other developed countries: deficit under control but debt too high

Hamish McRae
Wednesday 22 November 2017 18:29
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To say that Chancellors lie would be unfair, but they do polish their story
To say that Chancellors lie would be unfair, but they do polish their story

The trick to understanding British Budgets is to look at the numbers, rather than listen to the words. To say that Chancellors lie would be unfair, but they do polish their story. To say that the numbers tell the truth isn’t quite right either, because they are based on assumptions that often turn out to be wrong. But they are the better place to start. Here goes.

First, the economy. The growth projections from the Office for Budget Responsibility (OBR) are now towards the bottom of the range rather than near the top, the prime reason being they assume that while productivity will rise a bit, it will not recover to pre-2007 levels.

If that is right, and if we cannot go on increasing the size of the workforce as we have from pushing down unemployment, then it follows growth will indeed be lower. The result: growth around 1.5 per cent instead of around 2 per cent.

This is a pretty dramatic downward revision – not as dramatic as the revisions to government borrowing made by Alistair Darling when he took over from Gordon Brown, but big stuff nonetheless.

But is it likely to be right? There are a couple of reasons why it might prove overly pessimistic and one why it may be over-optimistic.

On the good side, we may be able to drive down unemployment and push up employment quite a lot more, by getting discouraged workers back into jobs and by increasing the numbers of people working beyond retirement age.

We may also be under-measuring growth. The OBR has a natty little panel showing that the early-1990s recession was not nearly as bad as initially thought, and the recovery from the 2008/9 one much faster than recorded at the time. The inference is that maybe we are getting things wrong now, and intuitively I think that is probably right.

Put the two together and the 2 per cent figure looks attainable.

On the less optimistic side there is, I am afraid, an elephant in the room. It is that we are due for another cyclical global downturn. That does not mean we will have one, or that it will be particularly serious if we do. It is just that this current expansion is already eight years old, and there are plenty of reasons to worry about it coming to an end, including disruption from Brexit.

Let’s assume, however, that the OBR growth forecast is more or less right – what about the Budget numbers?

The thing to be clear about is that changes in the Budget are, in financial terms, marginal. There is all this talk of the Government spending, sorry “investing”, a couple of billion more here, and cutting taxes there. But when you add everything up, the numbers are tiny. They range from an easing of £2.7bn next financial year, to £9.9bn the year after and £3.6bn the year after that.

To put these numbers in perspective, total Government receipts this financial year are projected to be £745bn. That is not to make a judgement about the detail of the Budget, for the changes may be clever, long-awaited, damaging or pointless, depending on your perspective. It is just to say that in overall terms they are irrelevant.

Will the Government succeed in getting the deficit down below 2 per cent of GDP by 2020-21 as planned? The OBR thinks it has a very good chance of doing so. Given that this year it looks like getting it down to 2.4 per cent of GDP (against 2.9 per cent expected in the spring), it should get there early.

Beyond that, who knows? But I think the general message that the Government is being reasonably cautious, but needs to be cautious, does stand.

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Put it this way: if we do go into a recession in a couple of years’ time, our fiscal deficit will be a lot lower than it was when we went into the last one, but our overall national debt level will be a lot higher.

In that regard, we are in a similar position to most other developed countries: deficit under control, but debt too high. It is a precarious situation for the UK, but then it is a precarious situation for the whole developed world. Among the large developed countries, only Germany (which is running a fiscal surplus) has really secure national finances, and it has other problems.

We don’t have much of a cushion if things go wrong – a messy Brexit, or a rapid rise in global interest rates, for example – and that must be a concern. Forget all the gloss put on the story by the Chancellor. The numbers are slowly getting better, but they absolutely need to go on doing so.

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