A bigger deficit?

Alan Budd’s job at the Office of Budget Responsibility is to inject realism into the inherited forecasts from Mr Darling’s Treasury.

He inherits some racy forecasts for economic growth. The last government thought the UK economy would sprint to growth of 3-3.5% next year, and stay above 3% for the following two years. The average of independent forecasters think 2.1% is likely in 2011, followed by 2.4% in 2012 and 2.7% in 2013.

There’s a difference in the impact on the government deficit. If the economy grows by 1% more next year that will generate around £6 billion of extra tax revenue, and save maybe £1.5 billion of unemployment and other costs. If the following year the economy grows by another extra 1% roughly the same favourable improvements occurs, taking the cumulative total to £15 billion. Go on like that for long and you will be talking serious money.

Turn it round, and it means that the new government may have to say the prospective deficit in 2011 will be several billions higher, and the 2012 one worse still compared with the current forecast.

When I wrote the Economic Policy Review I commissioned a paper which looked at the long term growth rate of the UK economy. Labour had recently hiked it to an unbelievable 2.75%. We concluded it was more likely to be below 2% once the debt bubble was blown away. It is true there is a big downturn to recover from, but it seems very unlikely that the long term rate of growth is anything like 2.75%, which in turn makes it unlikely we can enjoy three years of growth above 3%.
The only thing that could change that is aggressively to set out to make the UK the best place for jobs and business in the developed world by following pro enterprise tax and regulatory policies.

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26 Comments

  1. Javelin
    Posted June 3, 2010 at 8:25 am | Permalink

    My growth spread sheet at work has the following figures.

    2010 – 0.5
    2011 – 0.75
    2012 – 1.0
    2013 – 1.25
    2014 – 1.5

    • Mark
      Posted June 3, 2010 at 4:16 pm | Permalink

      Are those negative?

  2. Antisthenes
    Posted June 3, 2010 at 8:50 am | Permalink

    The right conditions set for the private sector will set the right growth rate but is does mean drastic reductions of regulations as that costs businesses billions. However the government is hamstrung by the regulations that have been imposed by Brussels how do you suggest that be overcome?

  3. Norman
    Posted June 3, 2010 at 8:59 am | Permalink

    I remember thinking at the time (and I'm sure everyone else in Britain did too) that the figures were complete fantasy. Must be frustrating for people in positions of power / responsibilty when this happens as they can hardly accuse the Chancellor of deliberately inflating the figures as he is the man with all the facts at his fingertips and so should know better than anyone.

    Although the last thing we need are more quangos this OBR (although ridiculously titled, it makes it seem as though it is either responsibe for budgets or it has to oversee the government as it can't be trusted) does seem a necessary evil after what we have just gone through.

    Not sure why the ONS couldn't have done this but I know nothing about these things and assume there must be good reasons.

  4. Andy
    Posted June 3, 2010 at 11:26 am | Permalink

    Is there also a compounding effect? Or is that already accounted for in the manner of expressing the growth? Or has it just been lost in the rounding?

    In the second year, that 1% growth is on top of the previous 1% growth, and so £7.5 billion becomes £7.57 billion; then £7.64 billion, etc.

    Getting out of a recession and sorting out government finances seems to me to be the archetypal example of the escape from a vicious circle.

    More spending is needed to support increased unemployment; more spending means higher taxes; higher taxes means fewer new businesses, and more closed down business; less business means less jobs; more unemployment needs more spending to support it. Vicious circle complete.

    As with all vicious circles, the solution is to take the brave, contrary action — cut taxes, and cut them at the very time you need more money.

    Now that you have access to the books, do you have an estimate (or a way of estimating) what growth would "cost"? What is the unit of exchange? How many pounds worth of growth do we get at the expense of a pound of reduced tax revenue? Surely once that question is answered, the decisions become obvious?

    • The Voice of Truth
      Posted June 3, 2010 at 1:07 pm | Permalink

      Would totally agree – we need to grow our way out despite the threat of lower Global GDP growth as the world deleverages. We need more of the cake – and pro growth policies vav regulation, taxes etc are key – so we need to cut government expenditure more aggressively than the economists would want and counter-intuitively cut 'business/entrepeneur' taxes as well to take up the slack in the economy.

  5. Javelin
    Posted June 3, 2010 at 11:44 am | Permalink

    I've already mentioned in a few posts the incongruence between the UK (and EU) political and financial market timetables in terms of market expectations of cuts and political delivery. I don't think Governments are serious about cutting debts deep enough and fast enough. Or worse – I'm not even sure they can make the cuts fast enough, even if they want to.

    I've said I think there will be a "crisis" in the autumn. By crisis I mean a threshold will be breached. That threshold will be the markets belief that an EU Government can reduce the Goverment burden on the markets sufficiently to help produce growth that will stop a deflationary cycle. This will be reflected though a threat of a EU sovereign default and the secondary threat to banks holding their bonds.

    I don't think history will say this credit crisis is over with. I think it will say we are in the eye of the hurricane – QE and holding back Government cuts being the eye – and that in the autumn we will see the credit crisis returning when confidence falls. Starting by a run on an EU bank and a freezing up of the credit markets once again. Followed by a period of recession/deflation as Government get round to tackling their debts.

    I can see growth at the sub 2% levels but I can also see high levels of imported inflation and deficit interest payments (40bn+). I can also see an ageing population an uncompetitive spirit. Far too many low skilled migrants who are a net drain on the state.

    When investors have money, do they want to invest in the UK – NO. Look at the PRU – they want to move their business model to Asia. Not good. So investors will increasingly look East to get the best returns. And in the East they will drive up prices – whilst imported inflation eats away at our spending then high mortgage rates, ageing populations, high Government spending, anti-competitive red tape will create a deflationary cycle.

    • Posted June 4, 2010 at 2:17 am | Permalink

      Exactly. They are not serious.
      We were promised a bonfire of the quangos, and what have we got?
      Practically the first action is to create yet another bl__dy quango!
      The Office of Budget Responsibility is nothing but a cynical ploy: "It ain't me, Guv!"
      Get a grip, you pant wetting "tories". There's already an Office of Budget Responsibility, and it's called the international bond market.

  6. Acorn
    Posted June 3, 2010 at 11:52 am | Permalink

    Growth of 3% would be nice. To really get a grip on the deficit AND the debt, we will need more like 7% for five years. That's Chinese like growth.

    You mentioned it in the Economic Review but, I am not hearing a lot about the considerable mis-allocation of capital that has occurred in the last couple of decades. This link from the Economics Network mentions it and questions what has happened to Capital to GDP ratio over that period.

    Could it be that we were building (capital gaining) houses to live in, rather than machines that could make things we could sell to foreigners?
    http://www.economicsnetwork.ac.uk/archive/maths_w

  7. Posted June 3, 2010 at 12:02 pm | Permalink

    Politically the best situation would be to have good growth in 2015, assuming the coalition lasts. I was under the impression that is why Osbourne wanted to cut the defecit in 4 years not 5.

    How much of the spare capacity freed up by recession was destroyed permanently and how much is currently free? If there is a lot free capacity then we should be able to run at a good growth rate for a few years before putting the brakes on as capacity constraints hit.

    2.1%, 2.4%, 2.7% sounds wrong.

    How much will the Olympics affect the growth figures? I guess most of the benefits hit before 2012 in the form of construction as well as the year of the Olympics itself.

    There are often reductions in growth after the the Olympics.

    From http://english.cri.cn/4026/2008/06/24/1721@372500

    "One of the sponsors of the Beijing Games, the Bank of China, has carried out a study of 12 Olympic Games spanning 60 years. In nine of the 12 Olympics, the hosts' annual GDP growth during the eight years following the Games was 0.4 to 2.5 percent lower than the eight years prior to the event, revealing that an economic slowdown after the mother of all sport meets is commonplace."

    This could mean 0.05% to 0.5% per year off growth from 2013.

  8. Posted June 3, 2010 at 12:37 pm | Permalink

    World average growth over the last decade has been about 5% annually. There is no intrinsic reason we cannot match it. The reason we have not done so is the amazing degree of state parasitism. Sime of the highest electricity prices in the world because of windmillery & the refusal to build new nuclear; elfin safety regualtion which, as well as killing 1,000 times more people than it saves costs us the work of 4 million active workers; EU regulations which, according to Comissioner Verheugen cost 5.5% of European GNP; housing regualtions which make houses cost 4 times what they could.

    As John points out even a small increase in growth massively cuts our deficit. If the Conservatives achieved the sort of growth China & India are doing, or even that of Russia & Brazil we would have no economic problems & Labour would be discredited forever.

  9. Posted June 3, 2010 at 1:42 pm | Permalink

    I believe all such statistics and forecasts should be produced by experts and published totally independently from the government. If the Chancellor, or indeed any other Minister wants to use different figures, he should have to explain why he thinks that his forecasts are better.
    This should apply to all issues, not only finance, such as immigration, jobless totals, crime, etc.

  10. Posted June 3, 2010 at 2:47 pm | Permalink

    Another excellent post, John: keep 'em coming.

    Could you give me a ring or email me your number when you've got a moment? I'm afraid I managed to jump into a pool with my phone in my pocket the other day, wiping your (and everyone else's) numbers.

    • StevenL
      Posted June 3, 2010 at 11:33 pm | Permalink

      Sounds like you're having a right old splash over there in Brussels Dan!

  11. Anand
    Posted June 3, 2010 at 3:50 pm | Permalink

    How has QE money fudged the growth figures for the last 12 months?

    Without this fictional printed money, surely we are still in recession?

    And additionally, having printed 12% of GDP, but getting not even 0.6% growth from it, could we argue we are very much in depression land?

    The one thing it undeniably proves, Labour governments have no idea how to get value for taxpayers dosh. They took 99% of the £200 Billion QE money, and spunked it up the wall giving us jack diddly squat for the effort!

  12. Richard
    Posted June 3, 2010 at 4:18 pm | Permalink

    Clearly explained as ever. You might mention this to Vince Cable when you next bump into him. On the radio this am when asked how the Government was going to get the economy going he talked about spending measures – I think he used the dreaded Brownite euphemism 'investment'. It even seems the regional development agencies have been reprieved (albeit the ones in the South are to be re-named)! (Does anyone reading this site know what these bodies do?) Conservatives need to explain to our Lib Dem friends that there are 2 ways to get growth going: get rid of costly regulation and cut taxes.

  13. JimF
    Posted June 3, 2010 at 5:42 pm | Permalink

    Just one small factor, but typical of what we face.
    June is Annual Return month for our Ltd Co. I used to spend 3 minutes signing the form and putting in the reply paid envelope-no changes.
    Then came internet submission. Now I log on and after a year have no idea what our password was which we were given last year, so having gone through the maze they e-mail a new password and ask for an authentication code which follows in the post 3 days later. So I log on again with the password and authentication code to find that I am now asked new questions about residency of Drrectors and are there any special conditions attached to our shares. It's not good enough to leave that box empty, so I call my accountant to ensure I should put "none" in the box before submission. I then pay by credit card and need to authenticate the card. Probably an hour or so lost overall.
    A sigh of relief that that was accepted first time and I can get back to work.

    • no one
      Posted June 3, 2010 at 9:50 pm | Permalink

      you should see the amount of time i waste on my personal tax return as an individual, crazy crazy crazy

      • alan jutson
        Posted June 5, 2010 at 5:21 pm | Permalink

        Agreed, I do not bother any more, just let my Accountant do it. He is so familiar with the forms and my finances, his charges are small by comparison to my time which I value at a greater rate.

        Monthly filling in of Sub Contractors Construction CIS forms also takes up time, even when you have to fill in a nil return because you have not used any in a particular month.
        Filling in nil returns each month is neccessary, otherwise a £100 fine comes your way each month you are late in submitting.

        Noticed how you now need to pay postage on everything as well. Postage paid reply envelopes have stopped.

  14. no one
    Posted June 3, 2010 at 9:54 pm | Permalink

    as per the other thread there seemed to be a consensus to tax buy to let landlords out of existance, the more i think about it the more this makes sense to me

    we should also tax people using imported 3rd world labour here working for the outsourcers on intra company transfer visas punative amounts, its silly allowing people to make big profits undercutting European wages with 3rd world nationals

    we should also tax any large company which moves patents and other IP abroad as this robs the UK economy of the opportunity to compete moving forward

  15. Mike Stallard
    Posted June 3, 2010 at 11:04 pm | Permalink

    Since the white English gave up in the 1960s, there has been a general air of hopelessness. We have stopped having children. We are growing very old. We delight in handing over to people who are not us. We happily say "Too many white, male faces" and stuff like that.
    Well, I think it is time to be really positive and to say: "Yes, we can". (NB the man who said this was in no sense a white Englishman! Our values are in no way exclusive or based on race.)

    And we really can too. All we need is the courage to get on with it. People are waiting for a lead; let's hope we get it – along the lines you suggest in your final paragraph.

  16. BillyB
    Posted June 4, 2010 at 12:21 am | Permalink

    It was said that before the election the winner would inherit a "poisoned chalice" – what makes you think that the coalition government can create conditions for economic growth here? What do we do better (economically) than anywhere else?

  17. Robert George
    Posted June 4, 2010 at 12:55 am | Permalink

    A month or so after the election we are still wondering what the real economic figures are, still speculating about what assumptions on growth (and most other things ) should be used in Budget projections.

    Labour manipulated and delayed statistics, never more so than in the last 6 months of their occupation.

    Is it not high time that the Office in charge of National Statistics was made completely independent of government (and ministerial interference)

    Personally I would advocate all economic data being produced by an entity with independence similar to the BOE.

    I would appreciate your opinion John as it seems much of the data inherited from Labour is fundanmentally flawed, fiddled, and fudged.

    I close in mild admiration of my own reticence with F words in considering Labour's record!

  18. Gareth
    Posted June 4, 2010 at 5:35 pm | Permalink

    If you consider how big the economy would be if the Government had not changed at all since 1997, annual Government spending would be around £150 billion lower than it is. Why has it ballooned and why isn't it getting results?

    If we accept the Government has been wasting money we must stop chasing our tails looking for overall growth at any cost.

    Due to the Government spending far too much borrowed money the economy is slower, less efficient and artificially larger than it should be. Shrinking the cost of Government is the most important thing and let the private sector look after itself. If that means GDP shrinking for a prolonged period so be it – the shrinkage will be in the parts of the economy that have been propped up/distorted by spending taxpayer money.

    The source of the Government bloat needs to be dealt with. Things such as limiting household benefits. Is it any wonder house prices are so high (especially in the South East) when the taxpayer has been propping them up? Limit senior public sector pay. Stop all the taxpayer funded networking away days. Make sure job training schemes are producing proper outcomes. Could job centres start encouraging self employment? Limit the boomerang bosses who retire only to return to authorities as consultants.

    Better and closer scrutiny of departmental spending by Parliament is a must. The steps towards greater transparency will aid that by enabling the public to be the eyes and ears for MPs to investigate matters.

  19. Lindsay McDougall
    Posted June 8, 2010 at 4:12 pm | Permalink

    I agree.

    Why ignore historical growth figures? Since 1979, compound GDP growth has averaged 2.1% under both governments. The Tory performance was better because we left the public finances in good order.

    The two periods when it averaged over 3% pa were 1982 to 1987 (1989 if you are prepared to include an inflationary period)and 1997 to 2000. In both cases, public expenditure as a % of GDP was in decline.

  20. Posted June 15, 2010 at 10:26 am | Permalink

    I must say that what really worries me is does Jo Public really understand when all these figures are daily used to project the growth or deficit of the country. I am in business and have been for 10 years, I know how much growth I have by the amount of work I churn our daily. I know we have to have measurements to be able to understand and compare ourselves to other countries but surely it could be made easier for people to understand. By making these figures so difficult to understand Politicians could tell the public anything, surely that does not happen!!!

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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