Not a lot has been made of the quick turnabout in policy. Philip Hammond presented a budget with lots of facts and figures and within a week, the key economic policy – being sensible – is out of the window and the budget has a £2bn hole in it.
This is not the first time this has happened with a “fiscally responsible” conservative government. George Osborne – the man who can hold down any number of full-time jobs – has had to reverse key policies within days – he was the man who decided a £4.4bn cut in benefits was not acceptable (in 2016). And he presided over the “omnishambles” budget of 2012 when various VAT changes (including the pasty tax) were later scrapped.
The problem is not limited to conservative politicians, with Gordon Brown announcing in 2007 he was “cutting” the 10p tax rate – which meant a hike in taxes, which he had to balance by national insurance changes of his own.
But the real problem seems to be the deficit in reality. When chancellors talk about “reducing the debt” what they seem to mean is “not borrowing quite as much as last year.” When ordinary people and businesses talk about “reducing debt” they mean paying some of it back.
When recent conservative chancellors talk about being fiscally responsible, they seem to ignore the numbers and try to claim that labour chancellors borrowed irresponsibly when borrowing under 40% of GDP (2005 to 2009 on average) when in recent years borrowing is only now coming back down to that level of GDP.
The idea of actually paying some of the debt back is still a dream. The “red book” which has all the forecasts in it still shows the government borrowing more money every year to 2021-22.
I realise that this article was written by an accountant (Richard Cree is editor-in-chief of economia, which is the magazine for Chartered Accountants) and can therefore be rubbished by all practising economists, but I do like his suggestion that economic forecasts are about as useful as a 5-year weather forecast.
Here are some highlights
About Mark Carney:
A week ago, on what some in the media insisted on labelling “Super Thursday”, (because how can a day feel important without a hashtag-friendly label?) the Bank of England governor, Mark Carney, released a huge quantity of economic data. From the slew of numbers and insights he offered up, one headline jumped out. Contrary to his advice the last time he gave such “forward guidance”, way back in July when the economics clearly looked completely different and when he announced interest rates were on the verge of being hiked up, rates would now not be going up until 2017.
This week, as better than expected numbers on unemployment suggest the economy may be on the verge of over-heating, it now seems plausible that Carney’s next forward guidance may move that 2017 date forward again.
About George Osborne:
Meanwhile, across town in Westminster the chancellor, George Osborne, is planning his next mini-Budget (how long ago it seems since he pledged to scrap these in favour of a return to an annual Budget). At the heart of his Autumn Statement will be a set of economic forecasts from the Office for Budget Responsibility (OBR). Or rather, a set of revised forecasts. And they will be wrong, or more accurately they will only be a best guess of what might happen. Apologies to the doubtless very clever economists at the OBR if they’ve landed a couple, but most OBR forecasts have had to be revised. In fact, the recent record of most of those who make a living from reading the economic runes hasn’t been great. Only a handful of economists predicted the economic crash (and many of those are from the Cassandra school of economics, rather like the former business secretary Vince Cable, who was once accused of predicting “nine out of the last three recessions”). Today you can find an economist prepared to collect together a bunch of financial and economic indicators that point to either the start of the next recession, the beginning of a golden recovery or anything in between. Can someone please just admit we haven’t really got a clue, that the models, if they were ever fit for purpose are broken?
If you want to read the whole article go to The fiction of forecasting
with George Osborne, but when he announced that he wanted the UK to run budget surpluses, I had to agree that this would make my ideas much easier. If the UK reduces its national debt, the idea of getting rid of all commercial debt becomes much easier.
Even selling off Royal Bank of Scotland would help as changing the nature of banks primarily from lenders to holders of assets is easier if it does not affect the value of a government owned asset.
I am not sure that there is any economic justification for George Osborne’s stance. The UK was very badly affected by the 2008 banking crisis but the UK is a major financial centre with a significant number of international banks and what is more many banks (including those based in the UK) were involved in the sub-prime lending at the route of the crisis.
I am not sure that changing the country’s underlying financing would have made a major difference to the crisis – the banks would still have needed significant help and it was the downturn in the banks which lead the economic downturn – because our economies are based on debt and the banks stopped lending.
For most countries the route out of the crisis was for governments to lend money effectively replacing bank lending and run deficits and, despite government rhetoric, the last Conservative/Liberal government also ran deficits every year.
I don’t agree with the justification of this new economic restraint on the government but I am happy for it to go ahead.