Coffee House

Autumn Statement: Downgrades R Us

4 December 2012

How much trouble is George Osborne in? We don’t need to wait until his mini-Budget tomorrow, we already know most of it. And we’ll enter that peculiar Budget game, where the already-known is restated and treated like news. CoffeeHousers might like to get ahead of the curve.

Growth evaporating

The Office for Budget Responsibility will have to follow the other economic forecasters and downgrade its growth forecasts for 2012 and 2013 (again). The Treasury collects independent forecasts monthly, and here’s how the picture has deteriorated since March:

Although the OBR significantly downgraded its forecasts for 2012 and 2013 last year, it hasn’t ever done so for its longer-term forecasts for 2014-16. But it will have to now, probably from around 3 per cent to 2 per cent.

Deficit forecasts up

A slower recovery means lower tax receipts, higher benefit spending and bigger deficits. The nugget of good news for George Osborne is that the government borrowed a little less last year than the OBR thought it would — £121.4 billion according to the ONS, compared to the £126 billion the OBR was predicting in March. But that’ll be cold comfort for Osborne for two reasons: it’s still be quite a lot more than the £116 billion he said he’d borrow when he delivered his first Budget in 2010, and he’s set to borrow much more than expected this year and in the years to come.
Of course, this is before any new policies Osborne announces tomorrow.

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The big question: Will Osborne break his fiscal rules?

On taking office, Osborne set himself two fiscal rules. The first — the ‘fiscal mandate’ — is ‘to balance the cyclically-adjusted current budget by the end of a rolling, five-year period’. No one noticed much at the time, but you can bet they’ll notice if Osborne has to tear them up now.

Back in 2010, the OBR showed him meeting that target with a year to spare. And the rolling nature of the target — which means that the year by which it has to be achieved is pushed back every year — provided an extra cushion. The IFS put together two forecasts last week: on its ‘optimistic’ one, Osborne would meet his target, but on the ‘pessimistic’ one, he’d fail. The OBR’s forecast will probably be somewhere in between, so it’ll be close.

Osborne’s second rule — the ‘supplementary target’ — is ‘to see public sector net debt falling as a share of GDP in 2015-16’. This is sometimes incorrectly summarised as a plan to have debt falling but, crucially, Osborne has no plan to cut debt. His target is just to have debt rising at a slower rate than economic growth. Beware, on Budget day, of people (especially Tories) mixing this up. Confusion between ‘deficit’, ‘debt’ and ‘debt ratio’ is endemic — and the result is that just 10 per cent of the public realise that debt is rising.

When first in office, Osborne had breathing room: the OBR showed the debt-to-GDP ratio falling in 2014-15, a year early. But in March this year, it had him barely meeting the target. Lower growth and bigger deficits will almost certainly wipe that out in the OBR’s new forecasts — even the IFS’s optimistic scenario has the debt ratio rising in 2015-16.

So is he doomed? Not quite. The above forecasts don’t take into account three factors that could allow Osborne to claim he’s still meeting both his targets:

Magic trick No. 1: Lower debt interest payments

The weak recovery means the Bank of England is now likely to keep interest rates very low for longer (and perhaps conduct more quantitative easing). That helps keep gilt yields low, reducing the amount the government has to pay to service its £1 trillion debt. (It’s interesting to hear some Tories spin the low interest rates as a vote of supreme confidence in Osborne.) But Citi Research estimates that this effect will probably only save the government £1 or 2 billion next year, up to maybe £10 billion in 2016-17 — not enough to keep Osborne on track for his debt target.

Magic trick No. 2: The QE interest transfer

As I reported a couple of weeks ago, the transfer of cash from the Bank of England’s QE programme to the Treasury might be enough to see the debt-to-GDP ratio falling in 2015-16 and hence keep Osborne on track for his supplementary target. But, as the IFS has said, using this effect to claim success would be a Brown-like deception and would destroy Osborne’s credibility. The Treasury itself swears blind it would never pull off such a stunt.

The OBR will include this effect in its forecasts, but will also tell us what they would be without it. Whatever the Chancellor does, we at Coffee House be looking at the latter.

Magic trick No. 3: New policies

Of course, if the OBR shows that under current policies Osborne would miss his targets, he might announce extra austerity measures — spending cuts and tax rises — to make up for it and keep us on track. We’ll have another post on what he looks set to announce a little later on.

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Show comments
  • TomTom

    Why do you even bother ? This is fantasy. Just because you can use a PC to draw graphics doesn’t reflect reality. There is a Real GDP – it is somewhere around 1990 and that is what Osborne is going to have to share around the UK Population + Immigration and it doesn’t look pretty. He’s hit personal incomes and will clobber families in 2013 but he pressure-pumps funds into the banking system as he extracts it from the household sector and lets the banks rake off 26%+ from households if they have loans or even qualify for them. You can only extract so much from households before they disintegrate

  • Troika21

    Where are we going, and why are we in this hand-cart?

  • itdoesntaddup

    Which debt is rising?

    Net debt including financial interventions fell by £79.0bn in 2011/12 to £2,168.8bn. It’s down slightly since then at £2,166.2bn.

  • barbie

    Thanks for the explanation for us novices. It does help to make us understand why we see such cuts taking place. However, I’m concerned that this drive to demonise the unemployed is getting out of control; many would work if the jobs were there to do. How can the poorest in our socieity take more cuts they are already on the breadline? It is not their fault the situation we are in, its politicans, and bankers that have created this crisis. The rich appear to be getting away with not paying their fair share, Osbourne says they will be made to pay more. However, they have already had a £40,000 tax cut, so whatever he does will mean he’s just clawing back what he gave before, and there will be no tax rise for these people. The poorest and ordinary workers will have to pay more as they’ve not enjoyed a tax cut at all.
    If you keep knawing away at the poor, and blaming them in the process they will fight back, like they did in the 80s when riots broke out, with unemployment rife. Is this what the Tories want again on their watch? If you stoke the fire long enough sparks will fly.
    There is a lot he could do, but ring fencing foreign aid is not one of them, he needs to protect British citizens who have paid their dues, not protect foreign shores. He needs to make foreign health tourists pay their way before treatment not after, and he should stop child benefit for foreigners and make them claim in their own countries. During this progress he should also pay for the first two children only. If you can’t afford them don’t have them, child birth control is available here. Of course he won’t take heed, they are blind and deaf when it comes to hearing the British voice.

    • Span Ows

      What the rich’s fair share? The top one percent of wage earners pay 27 percent of all income tax receipts and the top ten percent of 47 percent of all income tax receipts while the bottom 50 percent of earners pay just over 10 percent of total income tax receipts. then add on the mountains that ‘rich’ businesses pay in business taxes, corporation tax, rent and rates etc., the tax system seems unduly top heavy already. The only riot about tax was the Poll tax riots and they were militant and Marxist inspired and instigated with a innocents caught up in the fray. The Scottish shot themselves in the foot there whining that they were ‘Guinea-pigs’ but ended up paying more anyway via their correct Labour councils (still the same btw) but hey, paying more to Labour was never the same as a good chance to kick the Tories.

      Not protecting foreign shores/banning health tourism etc are another ball game altogether but

    • HooksLaw
    • Matthew Whitehouse

      You said – “its politicans, and bankers that have created this crisis”…

      The politicians (ie Blair / Brown) spending twice as much money than we can get in each year… And
      The Bankers, I dont believe that people not paying their “subprime” mortgage payments has wiped $£Trillions off the world markets… I’ll tell you what it is…

      Imagine I am a banker, I give my mate a loan of a billion (he’s a good mate).
      Then I write that off as “bad debt”. Simples! The rules state – I dont even have to tell anyone who the bad debt belonged to…

      ooh… I just wonder how many banks have done that!

    • Fergus Pickering

      How can they face cutsd if they are on the breadline? They will have to eat cheaper bread. I believe a nourishing loaf can be made from acorns..

  • Kevin

    “The weak recovery means the Bank of England is now likely to keep interest rates very low for longer”

    Yes, it is predictable that they will continue to do the wrong thing.

  • Archimedes

    “We don’t need to wait until his mini-Budget tomorrow, we already know most of it.”

    That seems a bit of a leaping assumption. Osborne will be viewing this as a way to revive his image, coupled with the discipline in what’s being leaked, it suggests that he might have a few things up his sleeve. He’ll surely be trying to make sure that this is not a boring statement, and he’ll surely have been preparing for the Autumn statement since March.

    • telemachus

      But we do know because Cameron sid so that he plans to allocate 5billion to infrastucture
      Bravo he is learning
      Build for growth. Almost a man of charisma

      • Fergus Pickering

        I have concluded that all the stuff about the charisma of Ed Balls is a joke. You’ve been having us on, you rascal you.

        • telemachus

          Soon you will understand
          Not long til 2015

      • TomTom

        Infrastructure £5 billion ? PEANUTS. They need £10 billion just to repair the roads for which there is an 11 YEAR BACKLOG – 11 Years Little Troll which means Gollum Gordon sprayed his money mania everywhere but on road repairs

  • albertcooper

    Of course you need to know what OBR stands for !

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