Wednesday, 5 December 2012

Some thoughts on the Autumn Statement

1) As the snow that I can see outside my window as I write this testifies, the Chancellor’s Autumn statement is misnamed - but it does have a winter’s feel about it. Yet again we have low growth that from the survey evidence looks structural. To quote from the OBR:

"Business and consumer surveys ... imply that the output gap had narrowed since the end of 2011 despite actual output being roughly flat over this period and much weaker than expected in March. This in turn would imply that the weakness in output over this period was structural and that trend total factor productivity (TFP) had contracted."

Now on this occasion the OBR has balked at following this evidence, and instead it has assumed that most of the slow growth has been cyclical rather than structural. Nevertheless their estimate of trend output has fallen, so as a result prospective UK austerity has now been increased and extended one more year (see Gavin Davies here). But you have to ask, if the survey information is not credible this year, has it been credible in previous years?

2) The Chancellor’s headline grab was to cancel the proposed increase in petrol duty. This cements his reputation as being decidedly anti-green. When the history books are being written in a hundred years time as the world struggles with average temperatures 4 degrees centigrade higher, George Osborne’s name will be on the list of people who helped that happen.

3) The statement included £5 billion extra in public investment, mainly paid for by reducing government consumption elsewhere. When I talked about rearranging the deck chairs, I thought I was using a metaphor and not a simile. Now it is probably true that the net effect of this on demand will be positive, when it happens. But if building a 100 new schools is such a great idea now, cancelling the project to repair existing schools two and a half years ago was clearly a very bad idea. As they say in the media nowadays, I think we deserve an apology.

4) One of the policy changes is a huge increase in investment allowances for small businesses. I really do not understand why this was not done earlier, and why it is limited to small firms. When I gave a talk at the Treasury in the summer I said I thought there was lots of scope for introducing incentives of this kind to get firms to bring forward investment plans. But why direct this to smaller firms, who may not be able to get the loan from the bank, when it is larger firms that have all the cash? [Edited from original, which complained that the measure did not have an expiry date. It does - it only lasts for two years. The hazards of reacting quickly to partial information!]

5) No doubt a lot of political capital will be made from the fact that the Chancellor has had to delay for a year meeting one of his fiscal rules. The opposition can say that at least Gordon Brown’s rules lasted for 10 years, while one of George Osborne’s has not lasted beyond two. Yet this ‘supplementary target’ was always rather silly, as it was vulnerable to a negative demand shock of the kind the UK has suffered. The main fiscal mandate, which is to achieve cyclically adjusted balance on the budget excluding investment, involves a rolling five year period. Now the criticism of a rule of this type is that it allows a government to keep putting adjustment off, but its advantage is that it allows flexibility in response to shocks. Obviously in the current situation I think the latter is more important.

6) We got the usual nonsense about austerity not causing the second recession. Luckily Chris Dillow makes the points, so I do not have to go over this again. Paul Krugman gets exasperated by having to play the ‘fiscal policy can have a big impact on demand’ record once more, just as I did here. Perhaps denial of this kind is understandable from politicians who do not want to admit mistakes, but less understandable when coming from good macroeconomists.

7) The FT asked me to write 300 words. Unfortunately the style didn’t match the other pieces they had, so there was a rather hasty re-edit, but here is the original which I rather like:

In a parallel universe somewhere....

Mr. Speaker



The OBR, using tried and tested methods, tell me that there is very little spare capacity. Apparently the UK has suffered an unprecedented decade of low productivity growth, for no obvious reason. We therefore need yet more fiscal consolidation.

But there is another possibility. Firms may be underreporting their capacity. Inflation is not falling because of commodity price shocks and rigidities when inflation is low.

I have no idea which explanation is correct. But a good Chancellor considers the consequences of mistakes they might make. I failed to do that in 2010, and I will not do so again.

The danger in following the OBR’s path is self-fulfilling pessimism. By tightening policy today, demand falls, and supply appears to fall with it. It may be years before we realise that the economy could have safely produced much more, and we will never get that output back.

That is why I am announcing today that there will be no further austerity. Instead, to test what the economy can sustain, I’ve agreed a £25 billion increase in public investment, funded by a combination of borrowing and higher taxes. Furthermore, I have told the Bank of England for the next three years to replace their current target with a nominal earnings growth target of 4%, and I’ve sanctioned unlimited Quantitative Easing in order to achieve it. I have asked the Treasury Select Committee to investigate possible longer term changes to MPC objectives, like a nominal GDP target.

Perhaps my policy will fail to produce extra growth and just give us higher inflation. But I know the MPC will act quickly to counteract this. At least I would have tried. The far greater danger is that by continuing down my previous course each UK citizen would end up losing thousands of pounds forever.

I commend this statement to the House.

8 comments:

  1. I agree. It is very depressing.

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  2. Good points in general Simon. I have one, slightly off the beaten track thought though. I, like you, agree austerity is not working if the target is an increase in output and a return to growth. However, we might want to think about that target. You talk about the Chancellor being 'anti green' for not letting fuel duty rise. However, by advocating ways to return to high growth, isn't there a sense in which you (and indeed I) are not taking into account the cost of that growth will have on the environment and therefore future generations? Isn't there a sense in which, therefore, austerity is an unintentionally green policy, whereas advocating higher growth is actually an anti green policy?

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    1. What we should be doing is investing in green technology. It is quite possible to have growth and reduce the output of carbon.

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  3. Also, I was wondering about your thoughts on lower taxes versus spending rises. You advocate the latter, but from what I've seen there's amble evidence to suggest the multiplier effect on the former is greater than on spending rises. What justification do you have for preferring spending rises to tax cuts?

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    1. Read this from Paul Krugman: http://krugman.blogs.nytimes.com/2012/12/06/notes-on-current-research/
      I've also written a good deal on multipliers, and also on this specific issue: http://mainlymacro.blogspot.co.uk/2012/04/on-successful-fiscal-consolidations.html

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  4. Hello. Thanks for your blog. I wondered if you had noticed that the Annual Investment Allowance increase does have an expiry date? - it runs for two years beginning January 2013. Maybe the Treasury were listening?

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    1. Thanks for correcting my error here - I've changed the post as a result.

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  5. Re: your point 4, politically, because anything focussed on SMEs is assumed to be inherently a good thing and ideologically, as the FLS makes clear, because any policies focussed on boosting demand e.g. a dirty great big government debt funded social housing programme, are very much verboten?

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