The UK Autumn Financial Statement is one of the two annual official forecasts from the UK Treasury each year. It also touches on government priorities and finances. Although it was focused on the UK, the trends there mirror the rest of the world as politicians battle slow growth and deal with austerity.
Lesson 1 – It’s all about debt… and so therefore it’s all about growth
For the first time since taking power, George Osborne delivered good news on the economy – growth forecasts up and debt forecasts down. This year’s growth is now more than double the previous forecast at 1.4% (versus 0.6%) and next year 2.4% (versus 1.8%). And the following years have been revised upwards too. This has had a significant effect on the debt projections, with borrowing this year £9bn less than previously expected at £111bn. For next year the borrowing forecast is £96bn falling until a forecast budget surplus in 2018-19 (if the fiscal plans do not change). In total, thanks to stronger growth, £73bn less will be borrowed over the five years than forecast back in March. This is great news on debt and is all thanks to the stronger economic recovery.
Lesson 2) Just like companies, governments also make use of “one off” accounting “funnies” to make the figures look better
Companies cover their results statements with exceptional charges, extraordinary items and such like to confuse and obfuscate the true underlying picture when times are tough. Not surprisingly Politicians are following their example. George Osborne used the OBR definition of “underlying public sector net borrowing” that excludes the impact of the Royal Mail Pension Scheme and Asset Purchase Facility Transfers. Expect other governments to do the same such trickery to massage their figures. Sadly this is nothing new as Greece did the same accounting trickery to meet the requirements of Euro entry in the first place.
(By the way, the Taxpayers Alliance is a British campaign group arguing for a low tax society and against big government. It estimates the “Real national debt” was £7.9tn in 2010 thanks to massive unfunded public sector pensions, unfunded state pensions and the costs of bailing out Lloyds and RBS. Its reminding us that “off balance sheet items” are not just for investment banks.)
Lesson 3) – Even if growth is better (and debt forecasts reduced) voters should not expect giveaways
In the UK despite much talk of austerity, debt as a percentage of GDP is still rising and will not peak for another two years at 80% debt to GDP by 2014/15. The debt mountain is still growing. And so despite better growth and lower debt forecasts, the Autumn Statement was fiscally neutral. No giveaways because there is just not the cash to do so. Governments are going to be mean with money for many years yet. Generosity is a thing of the past. There is little cash to buy voter’s approval with big give away budgets.
In Thursday’s Evening Standard a nurse was quoted as saying “the recovery has not been felt in the public sector yet”. And I doubt it will be for many years – public sector budgets are going to be tight for a long time. (The good news is for the management consultants who supposedly create efficiency savings. Delivering more bang for the same taxpayer buck is still the order of the day.
Lesson 4) – In an environment of debt, all governments will try and play the “we’re most attractive to business card” (except perhaps the French)
George Osborne introduced a number of tax changes to help the high street and small businesses. His office has also done much work on the impact of lowering the Corporation Tax rate and the many ways that it partly pays for itself by driving investment, wages and consumption. And of course, following the same theme, Ireland despite much criticism, stuck to its 12% corporate tax rate, despite being desperate for tax revenue. With little cash in consumers’ pockets and government coffers bare, then private business is the only player with cash. Governments will be after them and competing against each other to offer the tastiest morsels. (George Osborne abolished stamp duty for shares held in UK domiciled ETFs to “encourage those funds to locate in the UK”).
Lesson 5)– The temptation to be smug is high for politicians
To quote British Chancellor George Osborne “… this is the largest improvement to current year economic forecasts at any budget or Autumn statement for fourteen years”.
For the first three and a half years, Osborne’s Plan A faced sharp, vocal and bitter criticism. As the economy plunged and debt rapidly piled up, he stuck to his guns. He has been vindicated and should be applauded for his position. The Plan A Plan B argument was effectively won when the Labour party in the summer agreed to keep the coalition’s tax and spending plans if they won the next election.
For any politician having to bear the brunt of voter anger at austerity, the light at the end of the tunnel must be sorely welcomed. Don’t blame George for his smugness – he has earnt it!
Lesson 6) – Economic Data is notoriously unreliable (and the slump was worse than forecast)
I am always highly sceptical of economic numbers, and join Mark Carney and many others in the criticism of the quality of the data collected.
It is highly telling that it is only now, over four years after the event do we know the true cost of the crisis. Osborne started his speech with it: “The fall in GDP from peak to trough between 2008 and 2009 was not 6.3%, as previously thought – but instead was an even more staggering 7.2%” That’s is £112bn wiped off the UK’s economy.
Europe entered the crisis after the UK and the States and so the true economic cost of its slump is likely to be worse than originally expected.
Lesson 7) – In a world of austerity expect continued crack down on tax avoidance
In the times of plenty, tax avoidance was rarely mentioned in budgets. However in these austere times, as politicians scrabble for every pound down the back of the sofa, making those tax-avoiders pay is popular. It is also a Finance Minister’s dream – to magic money from thin air. It doesn’t cost votes but will crack down hard on a wealthy few. Unfortunately though, it often fails to work. Osborne tried this with his Swiss tax scheme which was supposed to raise £3.2bn for the treasury this year. Sadly it seems to have only raised £440mn according to a recent report in the Daily Telegraph. It is encouraging that Osborne is not put off by failure and carries on trying. However many will question whether he truly can raise £9bn over the next five years from his package of measures to tackle tax avoidance.
Lesson 8) – Banks are still an easy target
Banks are still hated by voters and so taxing banks, once they have recovered, is a politically easy way to raise revenue. In the UK, Osborne announced he will raise the bank levy from the beginning of 2014 to 0.156% to raise £2.7bn in 2014/15 and £2.9bn in 2016/16.
Banks are not going to be let off the fiscal hook by their political masters for a long time (and I have not even mentioned regulation). Of course taking capital out of the banking system means there is less to lend, but most voters and politicians do not seem to understand that.
Lesson 9) – Being in opposition is going to get tougher
Clearly for any government imposing austerity, it has been very easy for their political opponents to attack them. After all who wants to pay more taxes and get less public services? As debt mountains have piled up and economies stagnated, opposition has been easy. However as the UK recovers, Labour has to a certain extent been left without its key barb. Politically astute Milliband has come with his “cost of living” line of attack but that would have worked better when inflation was 4-5%. As economies repair then those in power become less easy targets.
Lesson 10) – Excessive navel gazing about the “quality” of the recovery
As far as I am concerned, we are in no position to be picky regarding the right type of growth. Any growth pays down debt. And that is all we should care about for the time being. However there is much navel gazing about it being the wrong type of growth – consumer spending lead and reliant on a strong housing market. The FT was particularly gloomy on Friday. However the shape of the recovery could well change. As I have argued before I think there could actually be a stampede to spend by the corporate sector to play catch up – finance directors finally approving all the capex projects put off during the last five years. And of course consumption does make up a lot of the UK economy anyway – 60-70%.
Let’s not be picky, any growth pays back our bills (but that won’t stop the scaremongers who fear a repeat of the great crisis.)
Lesson 11) – Politicians will pre announce and test policies in austere times
Governments do not have much fiscal room to manoeuvre. In a world of little cash, then every penny must be spent wisely and for politicians, that means getting the most voter approval for the cost of a policy. So trialling policies, leaking them to newspapers to see how they play out, makes economic and political sense. In a world of loadsamoney, then generosity is easy. In austere times, generosity is tough, so the politicians need to make sure it plays well. I did the evening newspaper review recently for BBC and one of the stories on the front pages was the proposal to ensure that if anyone aged 18-21 was without work, then he or she should be in some sort of education. That was exactly what was announced in the Autumn Statement.
Lesson 12) – Europe’s welfare is becoming less generous:
Following on from the policy above, any British 18-21 year old has to be either in work or some sort of education – in George Osborne’s words “A culture of worklessness becomes entrenched when young people can leave school and go straight on the dole with nothing expected in return. That option is coming to an end in our welfare system”.
And of course the increase in the pension age is long overdue with the state pension age gradually increasing to 70 over the coming decades.
Europe’s welfare is being cut down and this is a trend here to stay. The generous benefits of the past boom days are slowly being dismantled.
Lesson 13) – Expect actions to help youth unemployment
Europe has already announced its great plans to help unemployed youths. And George Osborne did his bit too. He abolished the “jobs tax” or National Insurance on young people under the age of 21, making it cheaper for employers to hire them.
Youth unemployment is such a tragic fate for those affected, it should be no surprise that politicians are desperately trying to do something about it across all countries.
Lesson 14) – Debt caps are becoming popular
Merkel tried it with her Fiscal Compact, and America has a debt ceiling enshrined in law, but now George Osborne is also jumping on the band wagon. He is proposing a “Charter for Budget Responsibility” to “reinforce Britain’s commitment to sound public finances” and also to cap overall welfare spending. If the chancellor of the day breaches his own welfare cap then he (it has never been a she) will have to explain why and hold a vote in Parliament. It all sounds a little like closing the stable door after the horse has bolted but clearly debt caps are becoming popular.
Faced with mountains of debt, the political reaction has been to try and ensure it does not happen again – fiscal responsibility is no longer taken for granted.
Lesson 15) – Even though there may be little changing fiscally, do not expect the political class to talk less
Despite the mini budget being fiscally neutral, George Osbonre still managed to talk for 50mins. It is unlikely that any Finance Minister would ever admit ”Do you know, we have very little cash to play with and so I am only tinkering about the edges. There’s not really much to say so let’s get it over and done it 10mins and then go to the pub.”
But wouldn’t it be refreshing?
Lesson 16) Beggar Thy Neighbour policies
In austere times, we have a tendency to look after our own. Immigration has become a hot topic right across Europe and particularly in the UK as Romanians and Bulgarians gain the right to come and live in the UK from Jan 1st. And George Osborne also wanted to raise tax revenue from those who own properties in the UK (primarily London) but are not residents in the country. The capital gains tax on foreign property investors begins in 2015.
Lesson 17) – Politicians will always give more time to the giveaways, than where they will claw the revenue back from
Looking at SKY’s summary of the Autumn Statement for example all the policies listed are the generous ones, there is little information about how these are to be financed. In austere times the giveaways are so small, politicians want to shout them out loudly.
Lesson 18) – ‘Responsibility’ is the mot du jour
Stability and security are also top choices. George Osborne mentioned these words five times in the first few seconds of his speech. However “difficult decisions” and “mistakes of the past” also feature. I imagine that many European politicians are making the same sort of comments to their electorates in their explanations of the fiscal mess. Also politicians are quite keen on the “we’re all in this together” line. George Osborne “Thanks to the sacrifice and endeavour of the British people…”
Clearly pre-crisis, the top words were growth and possibly wealth.
Lesson 19) – Politicans are like Generals, they fight the wars of the past
The words “asset price bubble” featured little in the rhetoric of the political class pre 2007. Now these speeches are littered with this great fear. George Osborne “I am the first chancellor to give the Bank of England responsibility and the power not only to monitor overall debt levels, but to take action to deal with asset bubbles if they threaten our stability”. And Vince Cable has also been warning too that house prices are “getting out of control”.
What a pity the original devastating bubble went unnoticed.
Lesson 20)- My last lesson is that politicians can even change the seasons as December is clearly not in Autumn
If politicans can’t even bother to be honest about the seasons, what else aren’t they telling us.
And for all those non Brits who do not know what a mince pie is, you do not know what you’re missing. My favourite? Made with puff pastry and not too sweet mince meat with added nuts, warmed up with a large dollop of cream:
