Slow growth forecast

The Office for Budget Responsibility produced a new and much lower forecast for growth. Out has gone the old government’s heady and unrealistic trend rate of growth of 2.75%. In has come the new age of austerity 2.1% long term rate. The OBR does think the next three years will see a trend of 2.25% growth, with it falling off after that. That means they are not expecting much of a recovery from the big slump of 2008-9. They clearly do not believe the Bank of England’s view that there is loads of spare capacity just waiting for orders for the economy to take off. They have come closer to my view that the trend rate of growth is now below 2%, compared to the post war average of 2.5%.

The OBR also said that the structural or underlying budget deficit is higher than Labour said. They did, however, lower the total deficit forecast for each of the next four years. This change depended on two moves to less caution in the figures. They have firstly decided more VAT will be collected as a proportion of the amounts owing than in recent past experience, and they chose to use the middle of their growth forecast rather than the bottom of the range used in the previous deficit estimate. They also believe that the sharp drop in the budget deficit compared with forecast in the last three months of 2009-10 came mainly from a sustainable increase in Income Tax receipts. They dismiss the idea that most or all of the increase was a one off from people and companies bringing forward income and bonuses ahead of the higher rate of tax for 2010-11. I wonder if they are right.

They do not produce a full and true balance sheet. They do point out there are £770 billion of unfunded public sector pension liabilities on out of date 2008 figures. The true position must be well in excess of £1 trillion by now. They come up with quite low figures for the off balance sheet liabilities through PFI and PPP, and duck giving a true view of the banking liabilities.

On spending, they reveal that on unchanged policies net pension payments surge from £4 billion in 2010-11 to £9.4 billion in 2014-15. EU net contributions rocket from £3.1 billion in 2008-9 to £10.3 billion by 2014-15, the price of Mr Blair’s bad negotiating. Social security goes up from £169.3 billion in 2010-11 to £192.1 billion by 2014-15, and debt interest from £42.1 billion in 2010-11 to £67.2 billion in 2014-15. These are some of the figures the new government has to seek to curb and control.

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24 Comments

  1. Sally C.
    Posted June 15, 2010 at 10:08 am | Permalink

    What a nightmare! All I can say is thank god we had a change of government. Gordon Brown should not be allowed south of the border, but I still say that Mervyn King et al bear a huge responsibility for the increases in spending either undertaken or committed to by the previous government and for the levelsof debt in the country as a whole. The Bank of England facilitated government spending and debt generally by keeping interest rates too low for far too long. I realise that they were not alone among central banks in pursuing a monetary policy that was far too loose, but that is hardly an excuse. The lack of action to rein in debt and spending and excessive leverage at the banks brought us as a country to the brink of bankruptcy. Yet no-one at the Bank has taken any blame at all.

    • nonny mouse
      Posted June 15, 2010 at 4:08 pm | Permalink

      Fiscal policy was the responsibility of the treasury which is directly controlled by politicians. Gordon gets all the blame for government spending. Actually I'd include Blair in there too because Blair is the one who announced the increase in NHS spending on a Sunday TV show without even consulting his chancellor, but thats another story.

      The problem with banks was down to the FSA, which should never have been split out of the BOE in the first place.

      Mervyn King's responsibility at the BOE was to keep inflation low and stable. I'd say he did a pretty good job.

      The parameters in which he worked (i.e. targetting inflation to a specific range) were dictated by politicians. If you want to argue that the BOE remit should be expanded to include asset prices then that seems to make some sense to me. Maybe that is a subject about which John could enlighten us.

      • Sally C.
        Posted June 15, 2010 at 10:22 pm | Permalink

        I don't disagree with a lot of what you say, clearly most blame goes to Gordon Brown for a number of reasons including his disastrous tripartite regulatory system. However, while Sir Callum McCarthy, former head of the FSA, did step down in recognition of the failings at the FSA, no-one has stepped down at the B of E.

        This is a quote from the Bof E's website:____'The Bank has a statutory objective to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom. The Bank does this through its risk assessment and risk reduction work, market intelligence functions, payments systems oversight, banking and market operations'

        I would definitely say that they failed to enhance the stability of the financial systems of the United Kingdom and that their risk assessments were totally ineffective.

  2. Denis Cooper
    Posted June 15, 2010 at 10:11 am | Permalink

    It seems premature to conclude that the long term trend growth rate is now below 2% rather than the post-war 2.5% – just as premature as Brown concluding that it had risen to 2.75%.

    Does anybody have any clear, impartial, idea what determines the trend growth rate of the GDP statistic?

    And to what extent does it represent real progress, rather than just an increase in the volume of money transactions?

    • nonny mouse
      Posted June 15, 2010 at 4:21 pm | Permalink

      Surely the trend growth rate is mainly determined by productivity gains. Maybe the recent productivity gains from introducing computers and the internet have peaked, but I think it is more likely that there are more to come.

      I guess it is effected by population growth too, so if immigration goes down (which it should) then that lowers the trend growth rate.

      We also have more university graduates which should raise the trend rate a bit, but given the poor state of the education system this probably wont have much of an effect.

      This is the nominal GDP growth rate, right? A better measure might be PPP-GDP which better shows our relative wealth compared to other countries. A devalued pound implies a lower PPP-GDP. In 2009 it was already lower than the nominal rate (34,619 vs 35,334, source wikipedia) and has probably got worse. I'm guessing that the nominal rate trends towards the PPP rate over time which also implies a lower nominal GDP growth rate.

  3. @pauldanon
    Posted June 15, 2010 at 11:02 am | Permalink

    We knew the news would be bad, but even worse is that this office (supposedly established to bring open-ness and probity to public budgeting) appears to have fudged the off-balance-sheet stuff such as PFI/PPP, nuclear decommissioning, unfunded public-sector pensions and railway-maintenance. It also fudges the value or otherwise of the nationalised banks. One wonders what the point of the office is. The rise in EU-contributions is alarming and adds insult to injury.

  4. Lucy Parfait
    Posted June 15, 2010 at 12:03 pm | Permalink

    So all in all the much heralded OBR has fudged the figures and taken the optimistic view. Well that makes such a change from the past. Surely the responsible way to proceed is to provide an absolutely complete balance sheet and take the pessimistic viewpoint. If a company accountant didn't do that he could be accused of incompetence or fraud if things went wrong which, of course, it has with both government and banks.

    • nonny mouse
      Posted June 16, 2010 at 12:41 am | Permalink

      Company accountants (and auditors which is a better comparison) have years of past history to go on. The OBR is new and the report was a rush job. To a certain extent they are making it up as they go along. I'm sure things will improve greatly over time.

      FYI: Hopi Sen's blog has a good article on the OBR, if you ignore the tribal elements in the comments.

  5. Michael
    Posted June 15, 2010 at 12:08 pm | Permalink

    Why did these details not come out in the pointless debate between Danny Alexander and Alistair Darling on Channel 4 last night?

    (rhetorical question; doesn't need a literal answer)

  6. nonny mouse
    Posted June 15, 2010 at 2:15 pm | Permalink

    Maybe we could send Maggie back in to negotiate with the EU. Even the threat of the handbag should get us a few billion pounds as a rebate.

  7. Robert George
    Posted June 15, 2010 at 2:39 pm | Permalink

    My initial response is

    1 Indexing of pensions has to go and all final salary schemes closed both immediately.

    2 We have to renegotiate EU contributions and renege on them if necessary.

    3 Social Welfare has to be restructured as per policy to make that jump a non event.

    That's just a start and it is all very do-able given sufficient will.

  8. CaptainP
    Posted June 15, 2010 at 3:00 pm | Permalink

    I know of many companies in the city that brought forward bonus payments and even one firm that paid two months salary in March in lieu of April's payment. It seems very unlikely to me that the surge in income tax receipts will be repeated in the current tax year.

  9. Richard Preston
    Posted June 15, 2010 at 4:49 pm | Permalink

    What is your view on the role of the government in now stimulating growth, given its apparently parlous state? According to many informed commentators, cutting spending is only one wheel on the wagon that's going to get us out of recession. In fact the government's proposed tax measures seem to be the opposite of some of the suggestions you make in your June 1 blog post on increasing the pace of recovery.

  10. Javelin
    Posted June 15, 2010 at 5:16 pm | Permalink

    The OBR's figures are apolitical – and don't take into account the forthcoming cuts.

    With the deficit running at 10% (give a few £10bns) of GDP then by my calculations if he cuts the whole deficit we get 2.5% – 10% = – 7.5%.

    He would have to cut £40 bn to avoid a double dipper – but this would cause a credit downgrade.

    If George cuts by less than £100bn then we will get a credit down grade AND a double dip recession.

    If George cuts by more than £100bn then we get JUST a double dip recession.

    But there is NO amount he can cut where we won't get a credit down grade a double dip recession.

  11. Acorn
    Posted June 15, 2010 at 7:04 pm | Permalink

    Please read http://budgetresponsibility.independent.gov.uk/d/… . It does have its short comings. It treads lightly over areas that will generate the most agro; mostly the public sector wages and pensions. There is no mention of the peak in payments to the current 6.7 million members of unfunded public sector pensions of £90 billion a year around 2040. The government will renege on these.

    Currently, a female police officer is paying around 11% of her salary into an unfunded pension plan. Her employer is paying about 26%. That's a total of 37% of her wages, you the taxpayer, are paying on top of her wages, for her retirement. That 37% should actuarially be 71% of her wages. Don't get me wrong, I know some of these ladies. You can't but be very concerned that on some night shift, some pissed up scroat, is going to push a screwdriver in her belly. My point is that we should recognise the total price for having her do the job we have asked her to do for us. A female police officer just happens to be the worst case of public sector pension under funding. http://www.iea.org.uk/files/upld-book390pdf?.pdf

    • Simon
      Posted June 17, 2010 at 10:52 am | Permalink

      So a middle ranking female sergeant's basic of £38,828 broadly corresponds to a private sector salary of £65k .

      Then add on regional weightings ,properly paid overtime , meal and travel allowances , job security , key workers accomodation , permanent sick leave benefit .

      The same person would have to be an ambitious career minded person to get a total package of even half that in the private sector .

      The Police did well out of the miners strike and will do well out of this crisis too .

      It's not a job I would be suited for but the total remeration should be transparent .

  12. Roger
    Posted June 15, 2010 at 8:21 pm | Permalink

    Is there any solution which will result in our economy becoming competitive in the medium and long term and not remain burdened by debt, and is this likely to happen?

  13. Mark M
    Posted June 15, 2010 at 10:50 pm | Permalink

    "the price of Mr Blair’s bad negotiating."

    It wasn't 'bad negotiating'. Mr Blair knew exactly what he was doing. He felt we owed the EU something, having rejected joining the Euro – and he wanted to be the President of Europe. This is a bung – his attempt to gain favour in the EU after not being able to convince his chancellor to join the single currency. It didn't work but he doesn't care. It's not like it's his money anyway.

  14. nonny mouse
    Posted June 16, 2010 at 12:55 am | Permalink

    Are there any predictions or even recent figures for GNI? I was reading up about the EU budget/rebate issue and the EU uses GNI rather than GDP. GNI does seem to be a better measure of the nations true wealth because it includes our investment income from abroad.

    I'm guessing that the GNI figures will be slightly less depressing than GDP because our investments would have held up relatively well, although BP might have just thrown a spanner in the works.

  15. Mark
    Posted June 16, 2010 at 12:22 pm | Permalink

    I had a look at the OBR report, concentrating first on the (off) balance sheet items. I was frankly surprised that they didn't even report on the potential impact of the Special Liquidity Scheme and the Credit Guarantee Scheme, because these fall due imminently (unlike pensions that will be paid out over decades) – and arguably should already be part of the National Debt.

    The picture on pensions seems highly confused: I think you exaggerate if you think that £770bn of obligation in 2008 has now become over £1 trillion. Pension valuations are subject to large variations for small changes in actuarial assumptions, particularly when discounting over long periods is involved. I would prefer to see projected payments in real terms as a line of annual cashflows for the next 30-40 years (i.e. assuming RPI indexation is factored out) – that is much less subject to actuarial tweaks. Presumably a reason for the increase in net pension payments is that new pension terms are already less generous, and may be garnering fewer "contributions" in recognition of that; there may also be provision for expected redundancies and early retirements with lump sum payments that swell short term payout but save over the longer term.

    We have a long way to go before we have information that is good enough to allow us to make informed judgements. I hope that the Treasury is looking at the underlying data – not just the differences between large numbers, as with the net EU contribution, net pension payment, etc.

  16. christina sarginson
    Posted June 16, 2010 at 6:07 pm | Permalink

    This blog gives a lot of information on the debt for the UK. I know this is really important and we do need to ensure we get growth for business etc, I am very pleased to hear already that the government have gone into action by stopping the recruitment of overpaid CEO's within the public sector. I can hardly believe that these individuals earn more than the PM.

  17. Richard1
    Posted June 16, 2010 at 7:52 pm | Permalink

    It is a concern that the OBR has not given a true & fair view on the Govt's balance sheet – I thought George Osborne was committed to this? The real debt picture is the result of the accumulation of all Labour's mistakes and bad policy. It is essential that it is highlighted or the Labour myth that the economic downturn is the result of a few greedy bankers and not 13 years of bad govt as well will persist.

  18. Socrato
    Posted June 16, 2010 at 10:41 pm | Permalink

    Hi all. I found a great site with very detailed information on the UK public finances by sector http://www.ukpublicspending.co.uk/. It has all the breakdowns by different categories over a long time series and is much better than the treasury website which is ridiculously complicated and user unfriendly, it also has barcharts and piecharts. Look, I'm no public accounting expert but I will give the basic grouping figures for both 2001 and 2010 to see roughly how much more we are spending than a decade ago – the figures are in my view alarming – particularly given the prospects for receipts going forward.
    2001 2010
    Pensions 68.3 119.1 +74%
    HealthCare 54.3 119 +119%
    Education 45.4 84 +85%
    Defence 28.9 43.7 +51%
    Welfare 61.9 105.1 +70%
    Protection 18.9 34.7 +83%
    Transport 9.1 24.5 +169%
    General Govt 9.5 26.7 +181%
    Other 40.1 83.9 +109%
    Interest 26.3 27.8 + 6%
    ——————————————————
    Total 367 661.4 +80%
    Inflation '01->10 367 = 440 +50% after allowing for inflation

    Anyone can see that spending has been way above that required to keep it constant. Realistically – a significant portion of this extra amount some £220Bn needs to be clawed back. Of course this excludes all the PFI/PPI & other off balance sheet items JR refers to. It is time to really put the case for reducing those items which had the greatest increase over the period. These are only main classifications – it is possible to drill down further and try to get to more of an idea by sub-category. There is but a week till the supplementary budget – and I simply hope they don't underwhelm. Its better to present a big headline figure – but as jobs are important right now – so CAPEX cuts / removal of state fixed assets would seem to be the way to go. Pensions will have to be tackled – every government has not wanted to touch this potentially seismic question. But while we are here best to start an all-party debate on that. Also how to roll back PPI/PFI – or renegotiate contracts or terms (i don't know if this is possible). Are we really saying we cannot make do with spending at 2001 levels (adjusted for inflation)? I dont think service levels have improved substantially since 2001 – more for less doesn't mean £6Bn in cuts it means £100Bn straight off the bat, coupled with aggressive tax cuts to stimulate new investment in facilities and jobs – as this is the only way we can compete and grow our way out of the deep trouble the previous administration has put us in. We already spend too much on education (in particular on expensive unnecessary facilities) and results are actually worse than they were in 2001. OK numbers of students are higher – but are we really producing the workers industry needs? Surely, a massive review of this policy is needed. We must understand that the internet has radically changed the possibilities for education particularly in higher education- it could be much more efficient and focussed for a much lower total cost – probably with better results. Look at the number of people opting for distance learning and also holding down a job at the same time. Earning while learning. Hard work but surely a better model for those looking to progress – who emerge with both experience and qualifications. Money saved here could be reallocated downstream to reduce class sizes in junior and secondary schools – as individual attention and mentoring intervention would work better when people are young. We need to light the fire of enquiry in our students – they are well capable of securing almost limitless resources on the internet nowadays. Indeed being informationally self-sufficient is one of the key traits of successful employees in today's workplace. The failure in education today is not about lack of resources it is about lack of proper teaching philosophy and an appropriate incentive structure.

  19. Neil Craig
    Posted June 17, 2010 at 1:55 pm | Permalink

    A far higher rate of growth is possible.

    Economic freedom + cheap energy = prosperity.

    We have had reductions in econiomic freedom with ever miore regualtion & government becoming over 50% of the economy. We have energy at as much as 4 times what is possible (& indeed being achieved in China) because government demands windmills.

    All that is needed for high growth is for government, any government, to practice traditional economic liberalism.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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