More of bleak winter rather than mellow fruitfulness as pain persists

Pity poor George Osborne having to deliver his Autumn Statement on Wednesday against such a wintry economic backdrop.

Only a few years ago, Gordon Brown was standing in the same spot and reeling off a list of superlatives about UK economic performance, while apparently managing simultaneously to increase spending, reduce taxes and keep borrowing down. What a chancellor!

Unfortunately, how chancellors are perceived at the time has much more to do with how the economy is behaving than with how good they are. (The same may soon prove to be true of central bank governors). That said, just as in a game of bridge, whether you have been dealt good or bad cards, you can still play them well or badly. And so far, this government has played its admittedly awful cards badly.

When there is nothing in the kitty, chancellors usually say three things to protect themselves: "It's all the fault of the other lot, whose mistakes we are having to clean up"; "Our problems are caused by some calamity abroad" (with the eurozone cast as the current villain), and: "I know that it is grim now but, providing that we see the present course through, it will soon get better." This last is known as "the sunlit uplands gambit". It can be deployed to considerable effect but not again and again.

There is also a time-honoured form of action: take from Peter to pay Paul or sometimes even from Paul, hoping that he won't notice that he is paying for his own handout. The overall impression can be helped by announcing several small measures that sound good but cost very little.

Actually, there is some scope to deliver a boost to aggregate demand by shifting spending around within the total. As I have argued before, in current economic conditions the planned increase in overseas aid is an absurdity. Money redirected here at home would increase demand. Moreover, it might be possible to raise public investment in the next couple of years, offset by more stringent reductions in current spending in later years. Even so, it is difficult to see how the Chancellor could make more than a marginal contribution to the economy this way.

At least Mr Osborne cannot now resort to what some chancellors have been prone to, namely to pretend that things are much better than they really are. He has outsourced economic and fiscal forecasting to the independent Office for Budget Responsibility (OBR). It is unlikely to do him many favours. He will have to report that, yet again, the OBR has been too optimistic in its forecast of economic growth and that, whereas at the time of the March budget, the economy was forecast to grow by 0.8pc this year, it now looks likely to be flat, or even to have declined a bit. (By the way, when the OBR first forecast GDP for 2012, just over two years ago, it reckoned that growth would be 2.8pc).

Meanwhile, the fiscal numbers have also been worse than expected, with borrowing so far this financial year running 7pc above last year's figure. It looks as though the borrowing total will come in about £10 billion above forecast.

If the OBR says that the Chancellor will miss either or both of his fiscal targets (to eliminate the structural deficit within five years and for the debt to GDP ratio to be declining by 2015-16) then, in my view, he should respond by pushing the targets further out into the future. To respond, by contrast, by announcing a further round of fiscal tightening would be madness.

The economy is in danger of falling into a triple-dip recession and he could push it over the edge. If that were to happen, he could kiss goodbye to hopes of lower government borrowing.

And in that case he might as well kiss goodbye period.

Some might fear that if he tamely accepts that the fiscal targets will be missed, then the UK could lose its coveted AAA status with the ratings agencies. But if this happened, it would be more of a minor blow than a disaster. A triple-dip recession should weigh more heavily than the triple A.

Of course, the Chancellor must care about how market participants view gilts. But they might not take much notice of a downgrade from the ratings agencies. They rightly judge the biggest risk to the UK to be the continued absence of economic growth, rather than whether an arbitrary fiscal target is achieved.

When will the pain end? At the moment it looks like continued economic weakness and sustained austerity as far as the eye can see. Yet it will end at some point. Gordon Brown's sweetshop years of never-ending boom seemed interminable at the time, and yet they came to an abrupt end. So, too, will this prolonged gloomy interlude. But not yet. And perhaps not while George Osborne is in charge.

Read the latest on the Autumn Statement 2012

Roger Bootle is the managing director of Capital Economics

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg


  • Trade now

    Trade now

    Create account for free with the No.1 spread betting and CFD provider. Losses can exceed deposits. More »