Pick-up in the economy is not the result of sticking to austerity as chancellor claims – it's what you get when you keep interest rates low
The growth numbers were revised higher. Public borrowing figures look less atrocious than they did at the time of the March Budget. Hard-pressed households will welcome having a pound a week knocked off their domestic energy bills as winter sets in.
For George Osborne, it was a blessed relief to be able to upgrade his forecasts, something he has not been able to do since moving in to the Treasury in 2010. But he was pushing his luck when he claimed that the pick-up in the economy was the reward for sticking to austerity.
For a start, the government has not stuck to the plan but has eased the squeeze in response to an under-performing economy. Nor is it the case that growth has resulted from virtue, a very Germanic view in which economics is a branch of moral philosophy in which countries that behave in an upright fashion get their just deserts.
Britain's recovery, by contrast, relies on repeating the sins of the past. Growth is not the result of the government's belt-tightening; rather, it is what you get if you keep interest rates at 0.5% for five years, then top things up with incentives for banks to lend for property purchase and state-backed incentives for people to take out home loans. Austerity ensured this bog-standard UK economic recovery was delayed and is weaker than it normally would have been. The chancellor was keen to point out that net borrowing was lower than forecast in March 2013, but forgot to mention that at £111bn it will be a lot higher than the £60bn estimate made in June 2010.
Osborne also skated over the lop-sided nature of the recovery. The main reason the independent Office for Budget Responsibility is now expecting national output to grow by 1.4% in 2013 rather than the 0.6% predicted in the Budget is that consumers are spending more. Projections for business investment and exports – the two sectors that were supposed to lead to a rebalancing of the economy – have been cut since the spring.
This pattern of growth can be sustained in the short term. With the pound at its highest level in five years, imports become cheaper and inflation falls. That means that household budgets stretch a bit further and the Bank of England is under no immediate pressure to raise the cost of borrowing. The housing market will be cooking with gas from now until the general election in 2015.
There has, though, been no underlying improvement in the economy. Growth has been brought forward from future years, helping to cut borrowing in the short-term but leaving the structural budget deficit – the bit unaffected by the ups and downs of the economic cycle – unchanged. Balancing the books will take until 2019, four years later than Osborne promised in 2015. Austerity will continue deep into the next parliament.
Osborne sketched out the message the government will be delivering week in week out between now and the election: don't be tempted to hand control of the economy back to the people who made such a mess of things in the first place. The chancellor's narrative is potentially a powerful one given that opinion polls suggest the public believes that the deep recession of 2008-09 was caused by Labour profligacy.
But it only works if three conditions are met. The first is that consumers keep spending at a reasonable lick despite the fact that prices will continue to rise faster than wages deep into 2014. Lower inflation should help but there is a risk that consumers will be more cautious than the OBR expects.
The second condition is that business investment kicks in to give the recovery a second wind. The OBR says companies will increase spending on new plant and machinery by 5% in 2014 and 9% in each of the three subsequent years. This looks like an heroic assumption. Likewise, the UK's share of world trade fell steadily even when exports were boosted by a fall in the value of the pound. Sterling's rise spells bad news for the balance of payments and for growth.
Finally, there's the assumption that at some point in the next year or so, rising living standards will boost Government popularity. At some point in 2014, earnings should start to rise more quickly than prices but probably not until the second half of the year. But voters may be slow to show any gratitude. In 2010, Osborne said it would take until 2013 for real wages to return to their pre-recession 2008 levels. He now says it will take until 2018. Truly a lost decade for living standards.
George Osborne kicked off his statement by boasting that Britain is the fastest growing major economy in the world. This lasted less than two hours. No sooner had the chancellor sat down than Washington announced that revisions to America's output data meant that Uncle Sam led the way in the third quarter of 2013.
The chancellor will be hoping that the rest of his package stands the test of time a little better. It may not.
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