The FT has said this morning that the Office for Budget Responsibility has told George Osborne that there is a new £20 billion hole in his budget forecasts. The reason, it says, is that "while Britain has staged a remarkable recovery, indicators of the economy's capacity for future growth have deteriorated." This means that "with unemployment falling quickly, the figures show that companies may have little room to expand production rapidly."
Unpacking that just a little suggests that what Osborne has delivered is a situation where his drive for austerity has had some extraordinary consequences. By slashing state investment and by cutting public spending in a process combined with an increase in VAT he guaranteed a fall in earnings capacity that reduced consumption and inevitably resulted in a private sector investment slump. At the same time his failure to reform banking meant that there was a credit squeeze for small and medium-sized businesses just as hundreds of thousands of people were forced into self-employment by changes in the benefit system, all of whom have, as a consequence, ended up in marginal and low productivity work.
This combination of events meant that state investment has fallen well below previous levels, there has been very limited net private sector investment by larger companies and very little investment by smaller companies whilst people are being forced into extremely marginal employment. It was, inevitable, as a result that productivity was going to fall, and any upturn in the economy was bound to be constrained as a consequence. The Office for Budget Responsibility has just realised this. Despite the fact that we have two million or more unemployed people in this country, with one million of them being young people ready and willing to work and open to training, there is, apparently, no capacity to employ them.
Despite this the goal is a balanced budget. Let me reiterate something I've said often: we do not need balance budgets, any more than we need budget surpluses. In an economy worth at least £1.5 trillion a year which issues its own currency and with inflation running at more than 2% on average a deficit of up to £30 billion a year simply represents standing still: it is the debt that can be afforded because of the fall in the value of money. Balancing the books in that situation is an absurd objective; it is simply an exercise in shrinking the state at a time when it is very obvious that the demand for state services exceeds that for private sector activity.
There is, however, more to it than that. As is very obvious, there are now very few state services that can now be cut without causing considerable hardship either directly through the imposition of poverty, ill-health, reduced life expectancy or unemployment or indirectly by reducing our long-term prospect for sustainable economic activity which has massive consequences for younger generations. As a result of further cuts would only increase the harm already caused by the programme of austerity. I would add, that with the exception of tax increases designed to reduce inequality (the 50p tax rate, new wealth taxes, reform of council tax so that higher value properties are appropriately charged, changes to corporation tax to penalise the accumulation of cash, etc) there is no justification for tax increases at the moment and the opposite may be true: we can actually do with tax cuts to improve people's living standards, with VAT being the obvious place to start.
In that case, where is the money to come from to create the new productivity that is required in our economy? I've said it before, and I will say it again; there are three sources.
The first is closing the tax gap. I will be writing much more on this over the next few months.
The second is green quantitative easing, whose time has surely come.
Thirdly, as I have also argued, the time has come for a levy on pension funds where I have proposed that 25% of all new contributions should be directed towards the creation of new employment activity, whether in the UK or not (to deal with EU lawyers' concerns), with tax relief being denied on contributions made of this target is not met.
In combination I believe that these three sources of finance could release a wall of cash to fund the investment that we need in the UK economy to deliver the growth that will be sustainable into the future, produce a low carbon economy, create employment, reverse the current decline and provide us with that missing part of the economic equation that Osborne has so effectively destroyed, which is hope.
There is, however, no prospect that George Osborne will deliver this. Regrettably, so strong is the economic consensus, no one else appears to want to do so either. We are stuck in a malaise created by the poverty of our economic thinking and not by the reality of our economic potential. That's what's so sad about the predictability of George Osborne's response to this latest forecast, which will be yet more cuts.
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Good old guardian describing it as a ‘black hole’, why not call it something less cosmically terrifying, more comforting like a ‘gap’, for instance.
Your point about the number of people in marginal, unproductive ‘self-employment’ is one that I would like to see highlighted every time a Coalition politician crows about the number of people in employment. I have yet to hear any interviewer or commenter in the mainstream media press them on this. Instead, they are allowed to parrot the same line every time, whilst ignoring the wider issues that you have raised here.
“The first is closing the tax gap. I will be writing much more on this over the next few months.”
How does your estimate of the tax gap change with a change in GDP?
Wait and see
“While Britain has staged a remarkable recovery…”
Where was that, then? I must have missed it. Real output is still below the 2008 peak and the 2013Q4 GDP growth estimate of 2.8% (annualised) is barely above long term trend UK growth. Some “recovery”! We’re nearly doing not quite as disastrously badly as we were in 2012. And what growth there is is mainly fuelled by unsustainable growth in household debt.
Indeed -how can the adjective ‘remarkable’ and the noun ‘recovery’ be justified without Alice in Wonderland logic being presupposed?
Simon
I think its remarkable that unemployment keeps falling & that our productivity per person likewise keeps on falling.
Neo-liberal economists, who seldom go outside, tell us that firms are keeping labour on in unproductive roles, awaiting the (mythical) upturn.
I know, & you probably know, that the private-sector firms who’ve taken over much of the work of DWP are incentivising people to be “self-employed” with a minimal income & thus claim working benefits rather than be on JSA. The firms were targetted to get people off JSA.
So, if I loiter the streets purposelessly, with no hope of finding a job, I’m a fail on their statistics.
If I loiter the streets purposelessly, with no hope of finding a job, carrying a ladder & pretending to be a window-cleaner, I’m a success on their statistics.
““While Britain has staged a remarkable recovery…”
Where was that, then? I must have missed it. Real output is still below the 2008 peak and the 2013Q4 GDP growth estimate of 2.8% (annualised) is barely above long term trend UK growth. Some “recovery”! We’re nearly doing not quite as disastrously badly as we were in 2012. And what growth there is is mainly fuelled by unsustainable growth in household debt.”
Exactly! Where is the spending? The investment? This “recovery” isn’t wage led – it is being run on the “never-never” of household debt and a government backed housing bubble. As I have pointed out before, you will quite quickly find out how “robust” this recovery is if interest rates stats to rise.
Not that you can call this a recovery. We are scraping along the bottom.
Given it’s its 100 year anniversary this year, shouldn’t the Bradbury pound be being considered as a money source?
Huffington post graphs UK GDP, we’re worse than other main EU countries and -1.3% below 2008. Politicians further mislead us on the level of total debt using ONS statistics that have the cost of bailouts off the books (PSBNex data is generally quoted).
http://www.huffingtonpost.co.uk/2014/03/10/uk-economic-recovery-gap_n_4934005.html?utm_hp_ref=uk