Osborne’s “difficult” Conference Speech
Chancellor George Osborne has weathered criticism of his economic policies from both sides of the political isle in recent months, so it was no surprise that the buzz word from his Conservative Party Conference speech was “difficult”. Life at Westminster is difficult for Osborne at the moment and it’s unlikely to get any easier.
The problem for the Chancellor is that he has staked his credibility on bringing down the UK’s deficit, yet he is also trying to be a pioneer of growth and jobs. In the current environment neither goal looks achievable.
Public sector net borrowing has failed to slow in any sustainable way. Since January borrowing has been on average GBP6.6 billion per month. But that disguises the fluctuations throughout the year, which brought the total to more than GBP60 billion by August. This makes the government’s target to cut borrowing by GBP20 billion to GBP120 billion this fiscal year difficult to achieve.
The Office for Budget Responsibility (the independent verifier of the government’s fiscal plans) forecasts public sector net borrowing to fall to 7.9 percent of GDP in the current fiscal year, down from 9.9 percent in 2010/11. By 2015-16 borrowing is expected to fall to 1.5 percent of GDP, but at the current pace targets such as these seem utterly detached from reality. Either more spending cuts come into play in the coming months or the government misses its 2011/ 2012 forecasts. At this stage the latter seems most likely. For a country that is meant to be on a path to fiscal consolidation, slippage at this early stage of budget restraint suggests the ship has blown dramatically off course.
The latest OBR forecasts date back to March, the next set is due to be released next month. Expect to see revisions to both fiscal and growth targets. The OBR expects to see growth of 1.7 percent this year, 2.5 percent in 2012 and 2.9 percent in 2013. This is far higher than credit rating agency Standard & Poor’s, which has forecast growth of 1.8 percent on average between 2011 and 2014. The International Monetary Fund (IMF) cut its forecast for the UK growth for the third time in nine months in September. It now expects the economy to expand by a fairly lacklustre 1.1 percent this year, and only 1.5 percent next year. It also warned that further growth under-performance would warrant a U-turn in policy and a slower pace of fiscal consolidation.
This is very worrying for Osborne. Low growth will hit tax receipts. Revenues and Customs reported that receipts from income tax, capital gains and national insurance fell as a proportion of GDP to 16.8 percent of GDP in 2010-11, compared with 17.8 percent in 2007-08 as a direct result of the recession. If we get sluggish growth as the S&P predicts then the UK’s tax receipts are unlikely to recover anytime soon.
Missed fiscal targets, downward revisions to growth: this could easily describe Greece or one of the other troubled nations of Europe, however soon it could be headlines describing the UK economy. The S&P may have re-affirmed the UK’s triple-A credit rating at the start of Osborne’s speech earlier this week but how long can the UK remain a triple-A country?
Osborne spoke proudly of this government’s “fiscal credibility” and his steadfastness to his fiscal plans. But they could be built on quick sand and Osborne is standing right in the middle of it. Either he reduces the pace of his deficit cuts to protect growth, or he sticks to his plan and growth slows and he misses his fiscal targets anyway. Either way the UK’s triple A credit rating looks fragile. So things could get a lot more difficult for Mr Osborne.
Image — Britain’s Chancellor of the Exchequer George Osborne delivers his keynote speech on the second day of the Conservative Party Conference in Manchester, northern England October 3, 2011. REUTERS/Suzanne Plunkett