TUC Budget Statement: Fiscal consolidation has failed. Make it stop.
In their June 2010 Budget the coalition expected the economy over 2010-2015 to grow in cash terms by 29%; instead it grew by only 20%. This amounts to a cash shortfall of £140bn (on the basis of today’s NA definitions, as on the chart).
£140bn is a big number that reflects a double hit, on quantity and price. With both the quantity of output and the price of that output growing much slower than the OBR expected, the growth in cash income (or nominal GDP, equal to output times price) has therefore been exceptionally weak. The Chancellor has finally understood the importance of nominal GDP and has been emphasising how the economy is much smaller than expected, but this deterioration has been underway for years. From an economic point of view, low growth follows government spending cuts that have restrained aggregate demand. The collapse in inflation follows the cumulative effects of inadequate demand leading to large-scale under-utilisation of resources. Normally inflation is understood as indicating the extent of spare capacity: at zero per cent in 2015, CPI inflation was last lower in the Great Depression.
On this basis, the news that the expected improvements in the public finances once more will not materialise is hardly a surprise (by £18bn according to the customary leak to the FT at the weekend). For this is only the tip of the iceberg. With official statistics now available to 2015, we are now in a position to review outcomes over the full period of the original June 2010 forecast which covered the years over 2010 to 2015.
The norm over the past six years has been: spending cuts, weaker economy, weaker income growth, weaker tax revenues, deficit reduction falling short, more spending cuts, weaker economy and so on. There was a break from this when spending cuts magically became spending increases in the year before the general election, but that’s over now. The cumulative effect of failed deficit reduction is that the public debt ratio has not been reduced, as on the chart.
On the basis of the European definitions, the debt ratio was supposed to start improving in 2013; instead debt has continued relentlessly to rise. In 2015 government debt was 88.6 % of GDP when it was expected to have fallen to 80.4% of GDP. This difference of 8 percentage points amounts also (and curiously) to £140 bn.
And to be clear: the goal of policy was not to reduce the deficit; it was to put debt on an improving trajectory. Deficit reduction was the means to that end; while some deficit reduction has been achieved, it has been inadequate to improve the public debt. To boast about some deficit reduction is like boasting about coming last in a race.
Our Budget Statement (read the whole document) begins with the analysis of the challenges facing British policy makers that George Osborne set out in his Mais Lecture of February 2010. He described a UK economic model based on debt (in his view both public and private) and imbalance, and made the case for change. The change he had in mind, of course, was to attack government as standing in the way of delivering balanced and sustainable growth.
We argue that this assessment has been proved definitively wrong.
The failure of economic growth has meant failures of productivity and prolonged depression of wages. None of the imbalances that the Chancellor (rightly) identified in 2010 have been resolved, most have worsened, e.g. the current account, reliance on manufacturing and lack of business investment; private sector indebtedness is still severely elevated.
The consequences for working people have been significant, both in terms of the quality and security of work, reduced standards of living and withdrawn public services and welfare support. And our statement includes new work by Howard Reed of Landman economics showing how the impact of spending cuts is severely regressive, hitting hardest those on lowest incomes.
The Chancellor continues to maintain that he will respond to the deteriorating conditions through a further tightening of policy, though the rhetoric is about ‘saving’ rather than ‘cuts’. This would be the wrong approach.
Our recommendations are aimed at strengthening the economy by acting on both demand and supply in tandem. Demand should be expanded by public spending on infrastructure, removing the public sector wage cap and rolling back cuts to public services. On supply, we recommend an industrial strategy including action on steel, R&D, climate change and state banks. Other recommendations include reviewing the implementation of Vickers’ proposals on banking, and specific asks on corporate governance, tax relief on pensions, young people and fairness at work. We ask again for the withdrawal the Trade Union Bill.
While many of these are long-standing TUC proposals, they are hardly radical. The OECD now also call for ‘urgent’ action. Seemingly discarding policy doctrine that they have previously supported, they now agree with the TUC that increasing public investment will support future growth and it will improve the sustainability of public finances.
We are locked into an endless cycle of failure, with failed cuts leading only to more cuts that will inevitably again fail. The increased risk today is that if action is not taken to boost growth, current disinflationary trends will turn into full blown deflation and future growth prospects will be even more severely damaged. To ensure that working people do not pay an even bigger price for the Chancellor’s failures, now is the time for him to change course.