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Hello Sunshine (with a slight chance of rain)
For the first time in a long time there’s genuine hope for the British economy, although our deficit is still worse than Greece’s
It was George Osborne’s moment in the sunshine on Tuesday as he delivered his latest Autumn Statement (aka mini budget), but in typical British fashion, there is still a chance of rain.
The good news from today’s statement was that growth is much, much stronger than anyone thought a mere 8 months’ ago. Compared to the Office of Budget responsibility’s (OBR) forecasts in March, its GDP forecast for this year is 1.4%, up from 0.6%. There were also upward revisions for 2015 and 2016.
This is undoubtedly good news, but should we sack the number crunchers? How can they have got the growth forecasts so wrong in March, did the economic recovery come to these shores wearing a disguise?
On a serious note, this is disconcerting, if the OBR and the Treasury had seen the recovery coming earlier then it could have helped businesses to invest, banks to lend and ultimately jobs to be created. While we don’t expect people at the OBR to have a crystal ball, these forecasts can have consequences for the real economy, so it is imperative to be as accurate and forward-looking as possible.
So what about the fiscal side of things? All of this growth has helped money to flow into the UK’s coffers –the deficit is expected to come in at £111billion this year, £9billion lower than the March forecast – no small chink of change. Added to this, the UK will not need to borrow to fund its spending by 2018 when we are expected to register our first surplus in this millennium.
But don’t get too excited as we still have one of the biggest overspends in the EU. To put things in perspective, we are worse than Greece: the Greek budget deficit is expected at 4.3% this year; the UK’s deficit is expected to be a downwardly revised 6.8% of GDP.
But the biggest cloud to the Autumn Statement’s silver lining is that the OBR believes that the improvement in the UK’s public finances is only cyclical, we were rooting for a structural change. That means that we are reliant on growth remaining strong and if we get another downturn our public purse could fall back into disrepair. In other words, we haven’t really changed our spending habits that much.
This has prompted Osborne to stick to his original fiscal consolidation plan. In fact he is so passionate about tightening the purse strings that he actually proposed a charter to write it into law that the Government must behave in a fiscally responsible manner.
While this is laudable, if this charter eventually leads to the UK imposing a US-style debt ceiling, then it could unleash the mother of all political battles every time the ceiling is breached, as we have seen in the US in recent years.
While Osborne may be sticking to the path of fiscal austerity, a few pennies managed to escape from his purse. Some of the biggest winners are our smallest people, 5-7 year olds will get a free school lunch. I hope, for their sake, that school dinners have improved since my day.
School leavers aged 16-17 will have to take training courses, and employers national insurance contributions for employees under 21 will be removed from April 2015, to try and bring down the stubborn youth unemployment rate.
The other winners are drivers, Osborne is going to freeze fuel duty in September 2014, and small businesses, after he extended the rate relief scheme out to 2015 and capped increases at 2% per year thereafter.
Overall, George managed to bask in the sunshine. It was always going to be tough to criticise the Chancellor and the best Ed Balls could do was lament the loss of the UK’s triple A credit rating. But the message is this – we still need to be vigilant. While the UK economy is doing well today, there are many obstacles ahead.
Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.
