Through the Looking Glass Economics
More than halfway through the UK coalition’s term of office, the British economy is becalmed. Output is flat and confidence is perilously weak. The UK is experiencing its slowest recovery since the 19th century. Nearly half a decade has passed since the crisis erupted and the economy remains no bigger than it was in 2006 – more than 3 per cent below its 2008 peak. It is no longer fanciful to talk about a lost decade.
This is in sharp contrast to Cameron’s ‘everything is on course’ speech delivered on Thursday. No wonder Ed Balls called it an ‘Alice in Wonderland’ speech at the weekend.
As we approach the Chancellor’s fourth Budget, we can already guess that much of the content will feel eerily familiar – growth revised down, borrowing revised up, an insistence that his policy is working and delivering low interest rates, some additional austerity measures to be announced for the future and some ‘more of the same’ policy in the short-term (corporation tax, the personal allowance and generic ‘deregulation’ being likely candidates).
It’s sometimes easy to forget quite how far off course Plan A is actually as.
To remind ourselves how things were meant to turn out it is useful to look back at the June 2010 Budget forecasts and imagine what the FT might be saying this morning if things had turned out as planned. This is my attempt to write such a leader:
As the Chancellor approaches his fourth Budget he will be feeling very confident. It is now difficult to remember how contentious his ‘emergency Budget’ of June 2010 actually was. In the past two and half years the economy has performed much better than many of the naysayers suggested was likely. Before the Budget many said that a plan to eliminate the structural deficit inside one Parliament was foolhardy, it would choke off growth and lead to higher not lower borrowing. The doom mongers have been confounded and the structural deficit is now set to be closed a whole year earlier than is necessary to meet the Chancellor’s fiscal rules.
The economy grew by 2.3% in 2011 before accelerating to 2.8% in 2012. Growth is set pick up further this year and is expected to come in at 2.9%. This is an historically rapid recovery from a major financial crisis. But the Chancellor is perhaps even more delighted with the composition of that growth. Low interest rates and weak sterling, coupled with cuts in corporation tax which reduced the cost of capital, have lead to a much-needed ‘rebalancing’ of the UK economy. Private business investment grew by 8.1% in 2011 and 10.0% in 2012, it is set to grow by another 10.9% in 2013. The trade deficit has been reduced from 1.7% of GDP in 2010 to 1.4% in 2012, it s expected to fall to 0.9% in 2013 and be virtually eliminated by 2015. Taken together business investment and net trade have contributed around two thirds of all growth since 2010.
Rapid growth has eased the squeeze on living standards. Despite January 2011’s VAT hike, real household disposable income grew by 1.2% in 2011 and by 1.3% in 2012. Household disposable income will have risen by almost 8% in real terms between 2010 and 2015. Unemployment now stands at 7.6%, still above pre-crisis levels but falling rapidly and expected to be just 6.0% by the end of 2015.
The Chancellor is rightly proud of his progress in tackling Britain’s deficit. Public sector net borrowing this financial year is expected to be £89 billion, a 40% reduction from the 2009/10 peak. The deficit is expected to be reduced to £60bn in the coming financial year. Debt/GDP will peak in 2013/14 at 70.3% before gradually falling. The structural deficit has been reduced from 5.3% of GDP in 2009/10 to just 1.9% in the current financial year. By 2014/15 the UK will be running a structural surplus of 0.3% of GDP, rising to 0.8% in the following year.
2011 and 2012 were exceptionally good years for the UK economy and things look like they will get even better in 2013 and 2014. The Chancellor has succeeded in his, unspoken, aim of aligning the economic and political cycles and speculation is already rising about next year’s Budget in which the Chancellor now has the fiscal space for around £15bn of tax cuts to be announced ahead of the 2015 election.