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UK Autumn Statement fails to tackle underlying problems

Posted on December 05, 2013 by Paul Mac Flynn

In the Autumn Statement today the Office for Budget Responsibility has upgraded forecasts for growth in the UK economy from 0.6% to 1.4% for 2013. Furthermore they have upgraded forecasts for 2014 and 2015 to 2.4% and 2.2% respectively. While much attention has focused on the speed of the UK recovery, the composition of any such recovery matters just as much. The first point to make is that while GDP growth appears to be growing again, it follows a long period of stagnation from mid-2010 to mid-2013. The absence of growth for nearly 3 years means that the level of UK GDP is still some 2.5% below its pre-crisis peak. Fiscal austerity smothered the beginnings of a recovery in 2010, and the UK economy is only now experiencing what by historical standards is modest GDP growth.


Much was also made about the economic position of the UK internationally, and that many forecast the UK to be the fastest growing developed economy. Firstly the UK is emerging from a period of stagnation and has much further to go than most comparator countries. Secondly that growth in the Eurozone and elsewhere is more subdued should cause concern and not triumph for an economy that is hoping to vastly increase its trade. Thirdly and most importantly we must look at the composition of growth and to what extent a recovery is taking place in the "real economy".
The recent spurt of GDP growth has been driven for the most part by increases in household consumption. At the same time, the household savings ratio has decreased significantly while levels of private debt remain worryingly high. Added to this, wages and in particular real wages have been stagnant across the UK economy. The UK's net trade position has deteriorated since 2010 and the level of investment has been completely flat. The risk that this growth represents is that it is not sustainable. There is no reason to expect a sudden surge in trade or business investment, neither is there any evidence to suggest that compensation of employees will dramatically increase in the next few years.


The chancellor announced today that because borrowing figures have for the UK exchequer have improved due to increased growth. However this analysis seems at odds with the government's strategy since 2010, which is that borrowing would be reduced by cutting expenditure. Borrowing increased above what was forecast over the last three years because of an absence of growth. Rather than signalling a shift in policy from the Government, the chancellor announced today that he would seek further reduction of £3bn over the next 3 years from public expenditure further endangering growth and future reductions in borrowing and debt.


The Chancellor announced that owing to the Barnett Formula, Scotland, Wales and Northern Ireland will see net increases in expenditure over the next three years. This is because spending in departments such as health and education which are spent in Northern is to be exempt from further reductions. A department such as defence will see substantive cuts but is decided and managed at UK level. However, the proposed modest net increase in Northern Ireland (NIO claim this is £176m over two years) must be seen against the backdrop of the cuts that have already taken place. As announced in the Comprehensive Spending Review in July, the real reduction in the block grant for Northern Ireland between 2014/15 and 2015/16 will be -1.7%, the largest of any region. The real reduction in the block grant over the period from 2010/11 to 2015/16 will be a reduction of 13.2%, also the largest of any region. While the UK government has made some attempts to rectify this through the reallocations from current expenditure, the overall effect of expenditure cuts on the Northern Ireland economy will not be reduced. This is before Northern Ireland decides how it will implement changes in Annual Managed Expenditure, namely Welfare Reform.
On Pensions the chancellor announced that an increase in life expectancy will now drive subsequent increases in the state pension age beyond the already announced rise to 68. This policy however takes no account of regional differences in life expectancy, nor does it acknowledge the difference in the physical demands of different occupations. It also ignores the role of health inequalities in life expectancy and quality of life, an issue that is particularly important for Northern Ireland.


On employment, the chancellor once again sought to highlight overall numbers of employment rather than the rate of employment which importantly absorbs the effects an increasing population. While there has been modest jobs growth, the chancellor made no comment on the quality of these jobs in terms of security of hours and rates of pay. He announced a plan to make out of work benefits for young people contingent on them meeting training and work experience requirements. Instead of setting punishments and traps for young people, the chancellor should have embraced the idea of a "Youth Guarantee" which was outlined in the NERI Quarterly Economic Observer last spring HERE. This would guarantee appropriate training, or paid additional employment experience for every young person, stemming the tide of long term and possible structural unemployment.


The chancellor did announce a plan to cut employer National Insurance contributions for those under the age of 21. While this could be a useful tool in the fight against youth unemployment, it could also be used by employers to lower overall labour costs and not result in any substantial increase in employment. Investing in a "Youth Guarantee" will make the long term difference in tackling Youth unemployment.


Overall, the chancellor made minor policy announcements on


- infrastructure spending which is still too weak
- business rates that will only apply to England and Wales
- Reductions in Green levies on fuel bills which cost Energy companies nothing, but which will have to be paid for by the exchequer.
- No expected rise in fuel duty, which will have to paid for through other tax revenue


In all this Autumn Statement seeks to portray an economy that is growing healthily and one that has benefited from austerity and will continue to benefit from it in the future. The reality is that austerity smothered a nascent recovery in 2010. The growth we have now is dangerously unbalanced and most likely unsustainable. Cuts to government expenditure will continue across the UK and in Northern Ireland. Policy announcements on youth unemployment are welcome but could prove to be too little too late.

Posted in: Government SpendingJobsMacroeconomicsNorthern Ireland Taxation

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