George Osborne must be secretly delighted at the Eurozone debt crisis. Not only can he pass on the blame for a UK slowdown that is largely home-grown but, more importantly, the prospect of irrational bond markets turning on the UK offers the only possible justification for the fiscal stance he reaffirmed today.
That is the thin veneer masking the truth of this Autumn Statement. Standing back from the detail this was a ‘no change’ budget. Yet everything has changed in the last year. Osborne’s deficit reduction plan was written when the Chancellor had reason to hope for a V shaped recession and recovery. Now we know this will be an L shaped depression. It is already inevitable that British GDP will sit below its pre-crisis peak for longer than in the 1930s. On top of that comes the Eurozone debt crisis and political stalemate in
. No wonder that despite the cuts Osborne will now borrow more than Alistair Darling ever planned. Washington
All our economic history suggests the only route to recovery from such dire straits is to stimulate domestic demand. But instead the Chancellor is persisting in sucking public spending out of the economy. His proposals for encouraging more private sector consumption and investment are well meaning enough, but totally inadequate for the task at hand. To kick-start the economy we need a big increase in business investment, financial sector lending and spending by asset-rich households. But none of that will be enough to resist the double headwinds of fiscal contraction and global economic turmoil. Osborne is becoming the counter-Keynesian chancellor, content to see pro-cyclical fiscal policy that actually exacerbates stagnation.
So those are the headlines. Here are some of the details that lept out for me:
(1) The Liberal Democrats deserve credit for preserving inflation indexation of out-of-work benefits. Low income groups find it hardest to cope with rising prices and we must remember that over the last 30 years the value of benefits in comparison to median earnings has plummeted. It’s only fair that, on the rare occasion that inflation outstrips earnings, poor households see the benefit.
(2) The flip-side is that the big reduction in tax credit payments will hit low and middle earners hard, reducing overall consumer demand and worsening work incentives. Although the poor are protected for now, these reforms further undermine the universalist principles of our welfare system. Fabian Society research indicates that tightly targeting welfare on low income families and reducing entitlements for mid and high income groups stores up problems in the long run. Evidence from across the OECD shows that because public consent is so important for sustaining welfare, systems which support higher income groups are also the most effective at preventing poverty. It is depressing that ‘anti-universalist’ sentiments seem to be dominant within both Coalition partners, even though each party contains proud universalist roots (Beveridge and Macmillan spring to mind).
(3) The fresh cuts to current spending are particularly concerning, given that they will pay for capital spending which may not come on stream for some time. This risks sucking money out of the economy at a moment of crisis. The idea of using public money to leverage in private investment is good in principle, but the rumblings in the press suggest that the deal is far from sealed. The Treasury will need careful watching to see if the pension funds and sovereign investors really come up with extra infrastructure spending.
(4) A final thought on State Pension Age. The chancellor seems once again to have pre-empted consultation on what is a key change to welfare entitlements. In principle I support increases to State Pension Age, if they are sufficiently gradual that each generation can expect to draw a pension for the same share of their adult life as the last. But there is a big caveat, which I wrote about a few weeks back. With health inequality rising, any increases to State Pension Age have a disproportionate impact on low income groups. On average men in the poorest fifth of English neighbourhoods become disabled at 55. Until this public health disaster is addressed can the left really feel comfortable with a rising pension age?