From the TUC

The Macroeconomics of the CSR

26 Jun 2013, by Guest in Economics

In terms of macroeconomic impact the spending review looks, at first glance, to have been a non-event. The promise of more infrastructure spending seems to be an illusion; the Chancellor seems to have shied away from creating a real local growth fund as suggested by Lord Heseltine (it seems the pot will be all of £2bn against a Heseltine request of £70bn) and there is no immediate change in policy.

As James Plunkett noted this morning the £11.5bn of cuts for 2015/16 have been pencilled in for sometime and today was more about getting the detail than the direction of travel. And has James also writes:

The Chancellor needs a further £13bn in both 2016-17 and 2017-18 on top of today’s cuts in order to meet his deficit targets.

In other words, under the current fiscal framework, there is a lot more pain to come.

So I think the bigger questions today should be about that fiscal framework. It has utterly failed. The triple A rating has been lost, austerity has been extended from 4 years to at least 8, debt/GDP will still be rising at the end of this Parliament and the fiscal rules have either been broken (falling debt/GDP) or proved meaningless (the rolling structural deficit target).

The pain in 2016-2018 that James identifies is driven by a failed framework.

It has noticeable today that Osborne did not talk about the framework at all.

If the CSR is to have any macro impact it may well be a harmful one. The Chancellor fleshed out his proposals for a cap on AME (annually managed expenditure) spending, what he thinks of as his ‘macro welfare cap’. He said:

The Cap will be set each year at the Budget for four years.

It will apply from April 2015.

It will reflect forecast inflation, but it will be set in cash terms.

In future, when a government looks set to breach the Cap because it is failing to control welfare, the OBR will issue a public warning.

The government will then be forced to take action to cut welfare costs or publicly breach the Cap.

We’ll exclude a small number of the most cyclical benefits that directly rise and fall with the unemployment rate – to preserve the automatic stabilisers.

Housing benefit, tax credits, disability benefits, and pensioner benefits will all be included.

 The aim is to find a way to ‘cap welfare’ without hitting the automatic stabilisers (simply put the automatic stabilisers are the fall in tax revenue and the increase in social security spending that occurs automatically as a country enters a recession, providing a boost to demand) but I struggle to see how he will achieve it.

Tax credit and housing benefit both contain a large cyclically element – in a recession unemployment increases and nominal pay is weak putting upward pressure on both tax credits and housing benefit spending.

This proposed cap (about which there are scant few details) looks like it could seriously reduce the scale of the UK’s automatic stabilisers and leave us more at risk of serious downturns.

We will have to wait further details.

Today’s spending review could have been a chance for the Chancellor to bring forward capital spending now (as the IMF have urged) and it could have been a chance to announce new, more sensible, fiscal rules. Both chances have been squandered for what looks like a politically driven, and potentially economically dangerous, half-baked scheme.

One Response to The Macroeconomics of the CSR

  1. Jon Davies
    Jun 27th 2013, 10:35 am

    With the Labour party now moving into election mode rather than opposition mode it was all a bit of a damp squib. By not aggressively attacking Osborne’s cuts Labour have let him off the hook short term. They maybe think that his own party will turn on him if there are no signs of the economy picking up in the next 18 months.

    Nothing has really changed with George Osborne blindly continuing in the same wrong direction with his party hoping that a European recovery will bail them out before the election.