PBR and the deficit: Not out of the woods yet!
In his updated Treasury forecasts, published as part of the Pre-Budget Report, the Chancellor demonstrated why we cannot take economic growth for granted and why action to begin repaying the fiscal deficit should definitely be postponed for the time being.
GDP will fall by 4.75% in 2009, according to the PBR, eclipsing the forecast of a 3.5% drop in the Budget in April. The better news is that the UK is widely expected to return to growth in the fourth quarter of 2009, with the Treasury forecasting growth of 1.25% in 2010. From there, growth of 3.5% is forecast for 2011 and 2012. As with all forecasts, especially in these unprecedented times, there are big ‘if’s’ attached to these figures. What’s more, the Chancellor admitted in his speech that unemployment is set to go on rising. RPI inflation is set to reach just 0.5% this year, before rising to 2.5% in 2010 and 3.5% in each of the two years that follow.
Figures such as these were widely predicted before the Chancellor made his statement today and will come as a shock to no one. What’s most important is that the correct policy responses flow from these figures. The most important of these is the need to delay repaying the deficit to ensure that we do not experience a so-called ‘double dip’ recession. Thank goodness, the Chancellor made the right call today.
The Conservative position is, to put it kindly, somewhat confused. A story published on their website before the PBR took place (as I write, their response to the PBR is not yet on the web), they speak of “taking the tough decisions to deal with the deficit and go for growth”. Yet in the absence of private sector demand, there can be no growth without government spending. Since cutting government spending will contribute in large part to deficit reduction, in the current economic climate, we can choose cutting the deficit or we can choose growth – but we can’t choose both.
Of course, it’s difficult to know whether, if they were in government, the Tories would take a more pragmatic line. Yet today’s FT contains interesting reports from both the US and Germany. In the US, a government windfall in repaid bank bail-out funds is being used primarily to support job creation. Deficit reduction is not absent from the debate, but it doesn’t make the headline. Meanwhile, Germany looks set to approve an 8.5bn euro package of tax cuts. In a UK context, the TUC wouldn’t necessarily prioritise tax cuts, but it’s interesting to see that stimulating demand takes priority over deficit repayment.
Let us be clear: the world economy is moving in the right direction, but none of us are out of the woods yet. This is not the time to cut spending. This is the time to prioritise economic growth.