The Institute for Fiscal Studies’ (IFS) analysis of the specific measures in the Autumn Statement shows a certain degree of frustration. From their (economists) perspective, there seems no unifying theme or direction. For example transferable allowances for married couples adds a complication to the income tax system, without providing a major incentive. Free school meals for all children in the first 3 years of primary school benefits better off parents, as those on low incomes can already claim.
And then there is the continuing squeeze on the size of the state. The government has already reduced the share of government consumption in GDP, but that is nothing compared to its plans for the next five years, as I note here. It is pretty clear that both the IFS and the OBR regard this plan as incredible - it just will not happen. So what is the point in putting forward a plan for an unrealistically massive cut in the size of the state?
I am sure both organisations know why, but cannot say. It is, as ever with this Chancellor, all about the politics. For example, when it comes to the specific measures, the married couples allowance is an attempt to neutralise the impact on some conservative supporters of the Prime Minister’s support of gay marriage! Other popular tax giveaways are funded by ‘cracking down’ on tax avoidance - a win-win combination in political terms, even if the numbers might be unrealistic. In terms of the big picture, the Chancellor wants to ensure that Labour cannot pledge to match his spending, tax and deficit plans. As a result, he will be able to go into the next election accusing the opposition of either being dangerously imprudent, or planning tax increases.
Is this not a dangerous hostage to fortune? If the Conservatives win the next election, will this mean that they will have to admit their previous plans were hopelessly unrealistic? Perhaps, but I suspect the OBR’s assumptions about the output gap will be too pessimistic, and so economic growth will bring larger than expected falls in the debt to GDP ratio. So even if the Chancellor does not achieve cuts in government spending on the scale planned, deficit targets might still be met.
In a rational world (i.e. one where the economics made sense) the opposition could argue that the government’s plans aimed to cut debt too fast. But the ‘too far, too fast’ argument has already been judged to have failed by the political class, which has swallowed the myth that Labour’s fiscal policy played a large part in creating our present problems. So Osborne hopes that his unrealistic plans will paint Labour into a difficult corner, and the LibDems for that matter.
Yet it is far from obvious that this trick will work this time. Labour can take these numbers at face value, and say that they can only be achieved by cutting funding to the NHS, or education (see Declan Gaffney here - HT Alex Marsh). While government austerity may (perversely) be accepted in bad times, when the economy is growing it may be more difficult to argue that we cannot afford to maintain existing levels of public spending.
The government’s attempts to gain political advantage where none should lie also tie its hands. Labour’s major theme at the next election will be the decline in living standards for most income groups. This in turn is largely down to the UK productivity puzzle. It is not obvious that this decline in productivity growth is the result of government actions. Yet, as I note in this Free Exchange piece on the Autumn Statement, the government’s attempts to claim credit for growth in employment means that they cannot publicly address the subject of the productivity puzzle, still less argue that it is none of their doing. Here is a slightly amended graphic from my Free Exchange commentary that might look good on a Labour Party election billboard.
|Conservative Lessons in Lost Output
So the battleground for the next election is set out. Labour will argue that living standards have shown an unprecedented decline (true), and the fault for this can be laid at the government’s door (half true at best). The Conservatives will argue that austerity has enabled the economy to grow again (false), and that continuing growth requires yet more austerity (completely false). Which will win out will be fascinating if you are interested in political spin, but it will all be pretty excruciating for any macroeconomist.