Osborne isn't going to get the growth he needs

Look past the spin and there isn't much in the Budget to be hopeful about

This was a disastrous do-nothing Budget from a failed Chancellor who promised much but has delivered nothing. In all likelihood we will see further downgrades of the UK’s credit status this year, perhaps even in the next few weeks. This was a Budget to buy votes with giveaways to beer drinkers and home buyers. It seems that millionaires will be able to use their tax cut to buy a subsidized second home so it’s a bedroom tax for the poor and a second home subsidy for the rich. It is unclear at this point whether existing home owners can use the allowance to remortgage another sop to Tory voters. The effect of this subsidy will be to push up house prices making it even harder for first-time buyers to afford the already high prices. There is no economic justification for this measure.

Forecasts and Fiddling

Embarrassingly the downgraded Chancellor had to reveal that the Office for Budget Responsibility (OBR) had slashed its forecast for growth for 2013 to 0.6 per cent, halved from 1.2 per cent they forecast in December and one fifth the 2.9 per cent it forecast in November 2010. Even then this looks overly optimistic: Capital Economics, which I trust, has a forecast of 0.2 per cent, which seems more credible. The OBR’s latest fan chart for growth, presented in the chart above, is presumably what Osborne is relying on, with all his digits crossed. The OBR forecasts that just in time for the election, growth in 2015 will be back to the trend growth of the Gordon Brown years of over 2 per cent that Osborne has frequently claimed was unsustainable. The fan chart includes the possibility that growth could be as much as 5 per cent in 2015 when business audiences see such numbers they just laugh. Just for comparison I’ve also reproduced the OBR’s November 2010 growth fan chart, where they were also forecasting growth could be as much as 5 per cent in 2012 and 2013. Osborne has bet the house on the OBR’s forecast, which will inevitably disappoint as all the previous ones have done. He is toast.

The Budget was full of spin and accounting tricks. Slasher Osborne was able to produce a wafer-thin reduction in the deficit from £121 billion in 2011-2 to £120.9 billion in 2012-13. But this appears to have been done by behind-the scenes-twisting of arms for departments to “underspend”. This led the OBR to say “it is very rare for the Government to underspend the departmental plans it has set out less than a year ago by such a large margin”. The OBR also noted, the “underspend” included the UK not paying its bills for membership of some international institutions. Not a great precedent. The Institute for Fiscal Studies was even more scathing; its Director Paul Johnson in his Budget Briefing argued that the borrowing numbers were “carefully managed” because “the Treasury managed by hook or by crook to stop borrowing forecasts for this year rising above last year’s borrowing. … It is unlikely that this has led either to an economically optimal allocation of spending across years or to a good use of time by officials and ministers.” Osborne didn’t go to the US for a holiday as he did last year as he had to spend so much time cooking the books.

Job creation

Talking of spin I had a Twitter response from Sajid Javid, who in an earlier column I had accused of misleading the House of Commons on 13 March, 2013 by falsely claiming that 1.2 million private sector jobs had been created over the previous two years. I had already had a run in with him on Newsnight. In part this arises because the Government wants to take credit for reclassifying 196,000 FE and 6th form college lecturers that were reclassified (i.e. fiddled) from public to private sector in 2012. On 20 March 2013 the Economic Secretary to the Treasury tweeted to me: “Check your facts. Actualy (sic), private sector job creation under this Government closer to 1.3m, EXCLUDING reclassifications”. It seems the coalition is really trying to spin this one hard because my colleague Russell Lynch had published an article questioning the claims that the coalition had created one million private sector jobs and received a complaining email from a press officer at the Department of Work and Pensions saying that “the rise since 2010 is 1.34 million. But the rise is still well over one million when you use figures adjusted to take account of the discontinuity. This produces a rise of 1.13 million so still over a million more people in private sector jobs”. Lies, damn lies and statistics.

So let’s look at the data from the Office for National Statistics website, minus the lecturer reclassifications. I am going to focus on data up to September 2012 as that is the only data we had at the time Javid made his statement, noting that the coalition wasn’t formed until May 11th 2010. These numbers are reported quarterly, so if we take March 2010 as the starting point then the number of private sector jobs created is 23,663,000 minus 22,514,000. So 1.18 million. If we instead use June 2010, which is more appropriate then the number is 856,000. Even if we assume that the coalition can take credit for half the jobs created between March and June that only gets you to 1 million, but that seems a stretch. Given there are time lags between policy implementation and impact it is bizarre the Coalition wants to take credit for job creation on 11 May, 12 May, 13 May 2010 or 17 June 2010, or even in August or September 2010. It would be interesting to hear exactly which policies they believe were responsible. I stand by my call for Javid to apologise for misleading the House of Commons.

Unemployment

Finally latest unemployment numbers are a big worry for the Coalition. The Government publishes numbers for rolling quarters which are simply the average of the monthly numbers the ONS now publishes. Simple maths suggests unemployment is going to increase in the next rolling quarter, because we already have two of the three numbers for December and January 2,503,000 and 2,614,000 and a low number for October, 2,430,000 is going to be dropped. If the February number is the same as in January unemployment would rise by nearly 60,000 to a rate of 8 per cent next month. If the rise we have seen over the last two months continues it could conceivably go even higher. When numbers are good the Coalition wants to take credit for them and when they are bad they want to blame everyone else.