By Martin Wolf
Published: March 24 2010 15:27
If a government can announce annual net borrowing of £167bn – or 11.8 per cent of gross domestic product – as good news, one knows that both the economy and the public finances are in serious trouble. So, indeed, they are. The UK will be living with the consequences of this calamity for a generation. Nothing that Alistair Darling, the chancellor of the exchequer, said on Wednesday changed this grim fact.
Yet the last Budget before an election was never going to be a serious statement about economic policy. It was an attempt to persuade the electorate to give a tired government that has presided over an economic disaster another chance. Judged by these standards, the chancellor did a remarkable job, helped by the lack of strategic clarity on the opposition front-benches. But the case is ultimately not persuasive. It slides over mistakes made in the past. Worse, it fails to set out the path ahead in sufficient detail. It asks for trust, when precisely that is in question.
The argument laid out by Mr Darling starts out from the premise that an unexpected global catastrophe overwhelmed the UK. It proceeds to claim that the government’s response has been vindicated by events. In addressing the challenge now confronting any UK government, it states that the measured pace of reduction in government net borrowing envisaged over the next parliament is wise. Finally, it underlines the role of an active state in promoting the economic growth the country needs.
In sum, as the chancellor concluded, “the choice before the country now is whether to support those whose policies will suffocate our recovery and put our future at risk or support a government which has been right about the recession, right about the recovery, and is right about supporting the people and business of this country to build a prosperous future”.
(TO ENLARGE CLICK ON : http://www.ft.com/cms/3920e9fe-3778-11df-88c6-00144feabdc0.jpg)
Does this convince? Only up to a point. In particular, the government bears substantial responsibility for the vulnerability of the economy and public finances and is, even now, relying on optimistic assumptions. It is not providing the fiscal insurance needed against worse outcomes. It is obvious why the government has made that choice: it does not want to frighten the horses. But the horses – the British electorate – are deluded. Since the economy is substantially smaller than expected, the size of the state has to follow. The question is how and when.
Consider the different elements of the chancellor’s argument.
First, yes, a global crisis overwhelmed the UK. But the consequences have been particularly severe here, particularly in terms of the fiscal fall-out. According to the Organisation for Economic Co-operation and Development, the fiscal deterioration is the biggest in the group of seven leading countries. The UK failed to create a sufficiently strong public sector balance sheet from the revenue from oil and gas and the profits of the financial and housing sectors. This failure stretches across governments of both parties. Perhaps more important was the inability to recognise the fragile underpinnings of the economy. That, too, was a national failure.
Second, yes, the response of the government to the crisis – its interventions in the financial sector and willingness to let the fiscal deficit expand – has been vindicated by events. The reversion of the Tories to pre-Keynesian economics has given the government more opportunity to crow over this than its hesitant initial responses deserve.
Third, no, the path for fiscal consolidation is quite risky, partly because it is barely spelled out. Estimates of the “structural” or cyclically adjusted fiscal position are probably worthless: nobody knows how much of past output was an illusion or how much the crisis will lower long-term growth. So I focus here on forecasts of actual growth, revenue, expenditure and borrowing.
On economic growth, the economy is now forecast to shrink by 3.75 per cent in 2009-10, slightly worse than the 3.5 per cent decline forecast in the December 2009 pre-Budget report. Next year, the economy is forecast to expand by 2 per cent, followed by 3 per cent in 2011-12 and 3.25 per cent thereafter. True, it would be 2011-12 before gross domestic product returned to levels reached in 2007-08. But then the economy would expand strongly (see chart). This is not impossible. But it is far from certain, as the Treasury recognises. The latter also forecasts growth of fixed investment at 4½ per cent to 5 per cent in 2011 and 9 to 9½ per cent in 2012, with export growth buoyant, too. I hope this proves true, but one cannot be sure.
On current receipts, the Treasury forecasts a recovery back to 38.3 per cent of GDP in 2012-13, from a post-crisis low of just 36.1 per cent this year. On total managed expenditure, the planned decline in the share of GDP is close to 6 percentage points (see chart). This assumes not only a return to growth, but a sustained squeeze. Even so, public sector net borrowing would be 5.2 per cent of GDP in 2013-14, while net public debt would reach 75 per cent of GDP. This would be well below the UK’s average public debt ratio over the past three centuries. The question is whether the UK also enjoys its historic credibility.
My guess – it can be no more – is that the huge post-crisis increases in private sector financial surpluses in the UK and other high-income countries, make such high borrowing manageable. But, if recovery is as vigorous as the Treasury hopes, consolidation should be faster. More important, the details of the squeeze on spending remain to be filled in. So long as this is the case, public finances are a hostage to fortune. Mr Darling said that “the next spending settlement from 2011 onward will be very tough – the toughest for decades.” So it will: public sector current spending is forecast to grow at 0.8 per cent a year from 2011-12 to 2014-15. The government should explain to voters how it intends to deliver such a tough settlement.
Finally, yes, the government offers much interventionism. For some, this promises a bold new departure towards French-style activism. For others, it is the harbinger of a return to the 1970s. I suspect it will prove much ado about very little.
The chancellor has done a decent job of playing a dreadful hand. But that hand was not dealt to him solely by the world economy. Mistakes made by his predecessor played a part. Now the government is offering the public a delayed return to fiscal stability, with many details still to be filled in. Is that good enough? No. One should have demanded far more. But letting the electorate into the know is – most politicians agree – not what politics is about. In such a crisis, that is more than a pity; it is a disgrace.
Copyright The Financial Times Limited 2010.
0 comments:
Publicar un comentario