The latest Autumn Statement could go down as the most boring statement that Chancellor George Osborne will deliver. There were no juicy bones for the tax payer or the public sector, the Chancellor acknowledged that the outlook for the UK is challenging, however he is going to stick to the path of fiscal consolidation.
A few hundred pounds on tax free allowances here, no new petrol or property taxes and a percent here or there on taxes, benefits and Government budgets. But that’s about it. Overall it was neutral – neither accelerating cuts nor cutting taxes, just rearranging deck chairs really.
Osborne was not going to rock the boat, the most he did was delay the target for public sector debt to fall as a percentage of GDP by one year to 2016/17, which means an extra year of austerity. There will be no plan B for the UK while Osborne remains at Number 11 Downing Street.
Although mostly dull, the Chancellor caught my attention when he said that people want to know we have a plan to pay down this debt. But who are “these people” and why does the Chancellor want to please them?
“They” are the rating agencies. Osborne created the most boring statement yet so the UK to retain its top credit rating. Being triple A in the current environment, when the US and France have been stripped of their top ratings, is quite an honour.
The Chancellor and the Prime Minister have staked their credibility on the UK’s fiscal plan and our record low borrowing costs; if we were to lose our top rating then they would have a problem on their hands.
On the surface this was a low key affair, however the Chancellor’s measured tone and pledge to stick to the austerity path might have tried to pull the wool over our eyes. He suggested that the austerity measures he is adopting are worth the hard work and are finally starting to bear fruit.
He said that the deficit has fallen by a quarter and that it will fall again this year as our borrowing needs drop. The trouble is that Osborne didn’t provide any context.
The UK’s budget deficit was equivalent to 6.2% of GDP as of September this year, which is a big improvement from the 11.4% deficit at the end of 2009. However, back then the economy was decimated by the global financial crisis and bailing out our stricken banking sector had blown a huge hole in the country’s finances.
The “recovery” in the UK budget has been fairly weak – in the years prior to the financial crisis the deficit was more like 2-3% of GDP. Looking on a slightly wider time frame than our Chancellor, the deficit still looks like a big problem that needs to be addressed. This slow pace of public finance reform is reflected in the national debt levels, which are set to continue to rise until 2015/16.
The rating agencies are unlikely to be fooled by Osborne’s cherry picking of the facts, which is why Osborne isn’t yet bold enough to take on the rating agencies and abandon his deficit reduction programme.
Some had expected him to delay the target of reaching a cyclical budget surplus by 2014/15, however he held firm. This may have been a courtesy to the rating agencies, who may be less impressed than Osborne at our efforts at fiscal consolidation so far.
Other countries have lost their triple A credit ratings and been fine, so why is the Chancellor so concerned about ours? It is because no other country has been in such a dismal fiscal and economic position as we have in recent years and managed to keep a triple A rating.
So, the Chancellor’s play act at fiscal consolidation is what is maintaining the rating agencies’ fragile trust in us. Added to that, if the fiscal forecasts are on the optimistic side, then one cut to AA + may soon turn into a cascade of cuts if our growth picture doesn’t pick up and we continue to borrow our way out of this crisis.
The Chancellor knows that our position in the economic pecking order is precarious; a boring budget that spares us our triple A could help to keep us in the top flight for another year.