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Chancellor makes autumn statement on the state of British economy

By DeusExMacintosh

Outlook for British Economy

Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy. The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.

Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted. For Labour, Ed Balls said the figures showed the chancellor’s economic and fiscal plans were “in tatters”.

Outlining his plans to MPs, based on economic forecasts from the independent Office for Budget Responsibility (OBR), Mr Osborne told MPs the UK economy was now forecast to grow by 0.9% this year – compared with 1.7% forecast in March and 0.7% next year, down from the 2.5%.

He said the eurozone crisis, a hike in global commodity prices and a new assessment that the UK’s economic boom was bigger and the bust deeper than previously believed was to blame.

Borrowing was falling and debt would come down but “not as quickly as we wished”. In 2011-12 borrowing is now forecast to be £127bn – up from £122bn forecast in the Budget and, over five years, the government is expected to borrow £111bn more than predicted in March.

The OBR forecast that unemployment would rise from 8.1% this year, to 8.7% next year – before falling to 6.2% by 2016. Its earlier prediction that a squeeze on the public sector would mean 400,000 job losses over five years has been nearly doubled, to 710,000 – as a result of extra spending cuts pencilled in for 2015-16, and 2016-17.

The chancellor conceded he would not now be able to eliminate the structural deficit and see national debt falling by 2014/15 as had been predicted. The structural deficit is now predicted to be eliminated by 2015-16, pushing it beyond the next general election.

- BBC News

31 Comments

  1. kvd
    Posted November 30, 2011 at 2:43 pm | Permalink

    Good stuff DEM! I always play a game imagining how I might have tried to make the point with your pictures. The best I could come up with was “We’re in deep enough, so we’ve decided to stop digging”.

    But I think I’ll just leave the job in your capable hands with my thanks for a smile ;)

  2. Mel
    Posted November 30, 2011 at 3:27 pm | Permalink

    The Tory morons are desperate to throw the UK into a deep recession or maybe even a lesser depression. Rather than take responsibility for the obvious results of bad policy, naturally they’ll then say “it woz the welfare state wot made us do it”, or something similar. All said with a posh accent, of course.

  3. kvd
    Posted November 30, 2011 at 3:42 pm | Permalink

    Mel, you’d prefer a Balls up?

  4. Posted November 30, 2011 at 9:09 pm | Permalink

    Oh yes, much of this is Labour’s mess, but the Euro trainwreck isn’t helping – and that applies to governments of all stripes across Europe. I’m also increasingly unimpressed by the ECB imposition of austerity on Eurozone governments like Greece, Italy and Spain. The latter two in particular don’t have a pensions crisis (relying on their traditional family structure to avoid what is largely a Northern European headache). Spain is being hammered for its housing bubble while Italy is still paying for badly run and profligate governments from the 70s.

    It is an absolute shambles.

  5. Mel
    Posted December 1, 2011 at 8:05 am | Permalink

    I think Krugman gets it about right.

  6. kvd
    Posted December 1, 2011 at 4:18 pm | Permalink

    M@5 that would be a noteworthy first, if true.

  7. pete m
    Posted December 1, 2011 at 6:03 pm | Permalink

    Would you prefer to be in Greece’s shoes?

  8. Patrick
    Posted December 2, 2011 at 10:01 am | Permalink

    I think Krugman is right, as are so many, on the doctrinaire economics of austerity and EU in general.

    I really think however that they are all wilfully missing the point on both. Yes, these countries should have made hard decisions in the good times, and yes it is fucked to make hard decisions in the bad times and they do in the short term only make the bad times worse.

    BUT, what do these same commenters say about the ‘Greenspan put’? They start talking about moral hazard, etc. Hard decisions, politically, socially, what-have-you, simply don’t get made in ‘good times’. There needs to be a threat to force them.

    The fact that the hard decisions haven’t previously been made doesn’t mean that they must not be made. The real story is not austerity now but the self-indulgent political class looking to pass restrictive labour laws and ever-more-generous benefit schemes in search of ‘easy wins’ during the good times rather than try and use the good times to make room for real reform. Their indulgence, partially cheered on by the self-same anti-austerity crowd, created this problem. Not the people now belatedly imposing austerity.

    If we did extend the ‘benefits put’ and keep the taps on, would we get the reaction we need? Would these reforms ever happen if we waited until the pressure was off?

    Separately, one country did make harder decisions during (relatively) good times: Germany.

    And now we want the Germans to turn around and pay for all the fuckers that didn’t. And otherwise sane people then stand around wondering why they won’t.

  9. kvd
    Posted December 2, 2011 at 10:48 am | Permalink

    Patrick@8 I tend to agree with your comments, but with a mild note that if one really believes in a ‘business cycle’ then what goes around comes around again. Proponents of one solution or another seem to come out of the woodwork at exactly the opposide of the cycle loudly claiming “you should have done this, back then” which by the time it’s stated is pretty bleeding obvious to say the least.

    Then there’s the other thing underlying a lot of this present commentary which Krugman put well in his very first para: “economists like yours truly have an embarrassment of riches: so much is going wrong, in so many places, that one hardly knows where to start”. The sheer joy of the economist presented with ‘such a lovely lot of new data!’ is a complete turnoff for me I’m afraid. To describe the present Euro situation with its attendant inevitable lowering of living standards, potential for civic unrest not to say violence as “an embarrassment of riches” is either quite ghoulish, or an indication of a loose grasp on reality.

    And while I’m on my low soapbox, there is a lack of balance in a lot of commentary these days. By that I mean if there are 100 facts regarding any situation, then the writer will present only the 38 or 53 which supports his or her position, and fail to mention the rest. I mean, I know the term “fair and balanced” is now completely corrupted, by how can anyone reach a conclusion based upon reading any such presentation? But this is accepted reportage.

    Quite honestly I find I get more value from the to and fro of polite discussion here between (to his credit) Lorenzo, and people such as yourself and Adrien and Mel – whether with him or agin him.

    fwiw

  10. Mel
    Posted December 2, 2011 at 1:40 pm | Permalink

    I like Krugman’s writing style. Economics can be dry, boring and incomprehensible but he makes it interesting and intelligible. Anyway, a lot of reputations will be made and lost as the current crisis unfolds, including Krugman’s. I’ll have to find a new messiah if he turns out to be wrong :)

  11. kvd
    Posted December 2, 2011 at 3:35 pm | Permalink

    Mel, I agree with you only to the extent that we are both praying ;)

    Using my low soapbox (as I do, to mount my high horse) here is an example of what I mean by unbalanced reporting. Using the interbank settlements stats at 30 June 2011, the BBC produced a very pretty interactive graphic representation of “who owes what to whom” – their words not mine. You can click on a Euro country, and see how much that country owed to any other country.

    It works a treat, with pretty colours, with deeper red indicating ‘deeper danger’ – whatever that means. For instance (choosing the simplest) you can see that Greece was bright red, and owed a total of 83.2Bn euros to a mix of other countries. Repeat the exercise for each, around the circle (and note no mention of China in any of this?)

    The punchline is basically “shock horrors! look how much they all owe!” But another way (and yes, perhaps I should get a life) is to restate all the inter-country effects, to see what the net position at that date was….

    Countries who are net debtors – USA Portugal Ireland Italy Greece UK

    Countries who are net creditors – France Spain Japan Germany

    Take just the UK (’cause it’s close to my heart): the graphic reports it owed 1,720.6Bn Euros., but its net position at that date was 153.8Bn Euros. I am not saying that this is ‘good’ for the UK; just that it’s a bloody sight different from reporting the UK as owing 1,720Bn euros.

    Happy to provide the Excel spreadsheet I concocted in about 5 minutes to deduce these figures. But is anybody still really satisfied with the BBC’s “who owes what to whom” presentation?

  12. Posted December 3, 2011 at 7:24 am | Permalink

    Monetary stimulus is better than fiscal stimulus. It does not run up debts, it operates across the economy, it is far less subject to political distortions. If fiscal retrenchment gives more space for monetary expansion, good.

    The UK is in a debt mess: not as bad as some folks, but it is. If the Bank of England went the whole hog on an explicit framework that would involve monetary expansion until incomes recovered, then they could both fix the debt mess and get economic expansion.

    And there is good historical evidence for this being eminently doable.

  13. Posted December 3, 2011 at 7:27 am | Permalink

    P@8 The extra wrinkle is that ECB’s mad monetary tightness (driven in large part by German bloodymindedness) is making things much worse than they should be.

    I would also point out that the Euro was based on a set of rules which no-one, including the French and Germans, kept to. The picture is more complicated than delinquent Mediterraneans and virtuous Teutonics.

  14. Posted December 3, 2011 at 7:37 am | Permalink

    P@8 Tyler Cowen makes the case for your position well here. I, however, agree with the comment by Luis Pedro Coelho:

    The fiscal and monetary issues are orthogonal. Too much discussion breaks along being pro- or anti-Germany and confuses the two issues (including in Germany).
    Germany is right fiscally. No transfers. I’ll even add that, unlike the relationship of the US with Honduras, Germany and the periphery, signed an agreement that there would not be a bailout.
    Germany is wrong monetarily. The ECB should ease policy. It need not be in the form of transfer. They could buy Bunds and it would be helpful for everybody as long as they are doing something in euro.

    Quite so.

  15. Posted December 3, 2011 at 7:55 am | Permalink

    On the UK and fiscal austerity; the UK is so in a bad place:

    So why did Osborne make the choice to deal with deficit first, growth second? The answer came from Fitch Ratings within hours of his speech:
    “The capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its ‘AAA’ status has largely been exhausted.”
    Let’s unpack this: Fitch calculates – on its own definition – UK debt will peak at 95% of GDP – higher than Germany or France. If there is a financial shock – such as a bank crisis or a Euro sovereign default – which lowers growth further, pushing UK debt higher, that – says the agency – would likely lead to a rating downgrade. At that point, depending on how bad the rest of the world is performing, the UK would lose its current historic low cost of borrowing advantage.
    Put plainly – there is a danger that a euro crisis would plunge Britain into the same vortex of downgrades, austerity and low growth that Europe is suffering.

    Hawke and economic reform, Keating and super reform, Howard and massive debt retirement, the RBA adopting explicit targets from 1993: Oz has had a run of good governance which so puts us ahead of the pack.

  16. Mel
    Posted December 5, 2011 at 9:08 am | Permalink

    SL says:

    “Oh yes, much of this is Labour’s mess …. ”

    If by that you mean the debt burden it is worth noting the the debt burden is actually not that great in historical terms. See this graph dating back to 1830.

    As I’ve pointed out before, it’s like we have collective amnesia about the huge debts Governments have historically ran up and dealt with.

    I also find it incredibly difficult to believe that crippling your own economy is a clever way to deal with debt. Also note that the Tory policy will impose many long term costs on the economy in a variety of ways, for example Tory-imposed poverty and unemployment and in particular youth unemployment will translate into long term health and law and order costs.

    Seriously, SL, you need to give on the Wall Street Journal view of economics.

  17. Posted December 5, 2011 at 10:20 am | Permalink

    M@16 Several points:
    (1) There is a difference between crisis debt and structural debt. Generating debt because of some great crisis is rather different from generating debt due to sustained dysfunctional budgeting.
    (2) The cost of borrowing matters. In a situation of huge competition for savings and income crunches, the cost of debt rises. Which then interacts badly with point (1). It not only rises per x level of borrowing, it rises as the level of borrowing rises.
    (3) Demographics. In a situation of growing populations/high fertility, future tax income is a good bet. Particularly if there is also high level of technological expansion. In a situation of low/declining fertility, future tax income is a much worse bet. Particularly if technological expansion has become “harder”.

    Historical data such as Krugman advances is the beginning of analysis, not the end of it.

    Australia had high levels of public debt in the 1890s and 1930s: much of which was structural rather than crisis debt. This was a major reason why we had such bad Depression experiences. Our much, much better debt position is a major reason why the GFC hardly touched us and the Great Recession passed us by.

    But I go back to my point @12. Monetary expansion is better. One reason why Oz has had “tight” budgeting is that it gives more scope for monetary policy to stabilise the economy. Our comparative success speaks for itself.

  18. Posted December 5, 2011 at 10:22 am | Permalink

    But I agree that the opinion pages of the WSJ have been pretty appalling over the last few years. At least on monetary policy.

  19. Posted December 5, 2011 at 11:03 am | Permalink

    Some years ago Krugman on euro problems and euro prospects:

    But if it turns out that Chirac’s political debacle is the beginning of a much larger disaster–the collapse of the whole vision of European glory that has obsessed France for so long–we can be sure of one thing: The French will blame it all on someone else.

  20. Mel
    Posted December 6, 2011 at 11:10 am | Permalink

    Lorenzo @17:

    “There is a difference between crisis debt and structural debt. Generating debt because of some great crisis is rather different from generating debt due to sustained dysfunctional budgeting.”

    Generating debt that enhances infrastructure and human capital is a worthwhile investment and repays itself. A debt averse government is running a lazy balance sheet. Where would we be in Victoria now if the State Government under Bolte hadn’t pushed debt as high as 68% to build airports, roads and sundry other major infrastructure projects? Poorer, methinks.

    ” Demographics. In a situation of growing populations/high fertility, future tax income is a good bet. Particularly if there is also high level of technological expansion. In a situation of low/declining fertility, future tax income is a much worse bet. ”

    The fertility argument is a furphy as capital continues to displace labour as the key factor of production. Moreover, we can’t even provide jobs for everyone who wants one now.

    Just imagine what would happen if all computers disappeared overnight and we had to go back to the bad old days, a mere 30 years ago, when typing pools, calculators and triplicate carbon copy forms were necessary. We would probably need another million workers in Oz alone to do the same amount of work. But we *do* have computers, so we don’t need these extra workers and barren women needn’t feel guilty.

    Economic thinking is going through some sort of Dark Ages at the moment and this, far more than debt bogeys and barren women, is the cause of our problems. Hopefully something sane will emerge out of the wreckage.

  21. kvd
    Posted December 6, 2011 at 4:51 pm | Permalink

    Lorenzo, there’s an article on The Telegraph website headed “OBR risks loss of credibility say economists”.

    I’m trying to decide if I should be worried, or just applaud the sub editor’s grasp of irony ;)

  22. Posted December 7, 2011 at 12:18 pm | Permalink

    M@20 I agree, debt is normally a perfectly reasonable way to pay for infrastructure. But the debt in question isn’t simply being generated to pay for infrastructure. (Particularly given a lot of modern politics is about NIMBY and BANANA and general hostility to infrastructure construction: dams, power, freeways — you name it, folk are against it.)

    Capital is not displacing labour in aggregate terms: the surge in unemployment is due to hopeless monetary policies and other cyclical features. (Some countries have entrenched unemployment but that has nothing to do with technology everything to do with labour market and other regulatory dysfunction.) So, the demographics do matter. Not least because the prospective of ever-increasing taxes give young folk reason to emigrate from high tax to low tax places.

    Contemplating the financing burden of various governments is moderately scarey stuff, given why they have such burdens.

    I agree that macroeconomics is not doing well at the moment (though I have always been fairly sceptical about it). But the debt crises are not “made up”.

    lvd@21 You’re a bad man, but I like you :)

  23. Posted December 8, 2011 at 4:22 am | Permalink

    M@20 Also, the effect of increasing level of capital is to make labour relatively more scarce and therefore more valuable. The more capital in an economy, the higher the wage rates.

    The pressure of globalisation on labour incomes is from expansion of the amount of labour able to operate in the global trading economy, not from capital.

  24. Posted December 8, 2011 at 6:20 am | Permalink

    the debt in question isn’t simply being generated to pay for infrastructure.

    It’s also important to consider the role of short term public debt in maintaining human and social capital through periods where the market will let it significantly decay. The output produced or debt incurred during the period may not be as significant to long term wealth as the maintenance of human and social capital.

    the effect of increasing level of capital is to make labour relatively more scarce and therefore more valuable.

    This is only to the extent that labour continues to offer something that capital doesn’t. As technology increases the broader capabilities of capital, it becomes capable of replacing rather than augmenting labour. This means labour (particularly low skilled labour) will have a continually shrinking field of output speciality and will become relatively oversupplied and less valuable in the marketplace.

  25. Mel
    Posted December 8, 2011 at 10:13 am | Permalink

    Lorenzo:

    “So, the demographics do matter. Not least because the prospective of ever-increasing taxes give young folk reason to emigrate from high tax to low tax places.”

    Actually this is just more myth making. Most professionals in the US earn far more than their Australian counterparts. Take GPs for example. If following the money trail is as important as you suggest then you’ll need to explain very clearly and precisely why the world’s general practitioners haven’t all packed their bags and headed to America.

  26. Posted December 8, 2011 at 2:26 pm | Permalink

    D@24 Yes, there has been a sad decline in back-breaking work in the fields. Every time there is a cyclical surge in unemployment, these arguments get trotted out. They go away once unemployment starts falling seriously. That Oz has 5% unemployment while Spain has 23% unemployment has nothing to do with capital putting folk out of work.

    M@25 Actually, I wasn’t thinking so much of established professionals.

    Besides, given the legal nightmare that is medical practice in the US, a lot of that gross medical income gets eaten up in legal and other insurance costs.

    Of course, the really mobile factor of production is capital, which is why capital taxes tend to have such high deadweight costs.

    There is a sense in which I agree with you: if the BoJ, the Fed and the ECB had sensible monetary policies, a lot of the debt crisis would go away. Indeed, if they had done better, a lot of the new debt would not have been accumulated in the first place.

    Nevertheless, accumulating debt that does not portend increased future income is a losing game.

  27. kvd
    Posted December 8, 2011 at 5:40 pm | Permalink

    That Oz has 5% unemployment while Spain has 23% unemployment has nothing to do with capital putting folk out of work.

    Depends how you phrase it Lorenzo. For example, I’d say that the reallocation of capital away from Spain, to countries such as Australia, has everything to do with ‘putting folk out of work’ in Spain.

    Or as you put it more succinctly: “the really mobile factor of production is capital”

  28. Posted December 8, 2011 at 6:00 pm | Permalink

    Yes, there has been a sad decline in back-breaking work in the fields

    My point wasn’t that it was a bad thing, but rather it means that the market value of one’s labour ceases to be an effective mechanism for society to distribute wealth. Thus, there is a need to tax those with capital in order to provide for people who lack capital (i.e. government spending that isn’t infrastructure investments).

    That Oz has 5% unemployment while Spain has 23% unemployment has nothing to do with capital putting folk out of work.

    I’m not saying it’s always the case, but it does happen. Eventually even skilled workers in the West will start being replaced by machines that can do it cheaper. Capital will be invested in an ever shrinking pool of highly skilled workers in order to further increase the ability of capital to produce output independent of workers, rather than invested in improving worker productivity. Having the common good of human and social capital trashed by the private actors in the market as a result of the GFC will likely speed up that process.

  29. Posted December 9, 2011 at 5:18 pm | Permalink

    M@25 The other point is that the tax burden in Oz is almost the same as the tax burden in the US, so relative taxes are hardly likely to be a big factor.

    The thing with taxes is always: what trade-off are you getting? Venice, the Netherlands, England were all relatively high tax countries in their C15th, C17th & C18th heydays respectively, but you were getting much better public goods for your taxes in negotiated trade offs compared to other countries.

    Regulating young folk out of jobs while building up tax burdens to support their elders in a situation where the number of young folk is declining is not a winning social strategy. As much of Europe is discovering, even if ECB incompetence and fiscal duplicity is bringing the crunch earlier than it would otherwise have been.

  30. Posted December 9, 2011 at 5:22 pm | Permalink

    D@28 Yes, capital does render specific types of jobs nonviable. Speaking as the descendant of agricultural labourers, good thing too.

    What I am disputing is the aggregate claim: that capital is somehow “squeezing out” labour in toto. The level of capital in the economy has increased enormously, the labour market participation has gone up. There are all sorts of jobs now folk could never have imagined 50, 75, 100 years ago. There is also more leisure. I suspect both these trends will continue,

  31. Posted December 9, 2011 at 5:34 pm | Permalink

    A nice post on debt crisis as product of monetary policy failure. I know I bang on about monetary policy, but it matters.

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