The British Chancellor George Osborne told the British people during his fiscal presentation yesterday that the “The sun is starting to shine – and we are fixing the roof”, which was code for the age of austerity is over. The problem with that narrative is that the sun over Britain is pretty weak, has been shining since 2012 when the British government deferred its austerity push when the nascent economic recovery it inherited tanked after its first fiscal exercise in June 2010. The strategy then was clear – they kept the fiscal deficit at relatively high levels (even if some of the shifting of expenditures etc cause inequities and undermines the prosperity of certain cohorts). Those deficits have supported growth over the last several years. But growth has also come from the stimulus the government gave to the housing sector (not the construction of houses but the churning of existing stock) in the 2012 and 2013 Fiscal Statements (aka the ‘Budget’). That growth strategy is ephemeral because the household sector can only absorb so much extra debt given its already highly indebted state. Overall, the fiscal narrative in Britain put out by the Conservatives is a lie. They have not created a nation of “Makers” and growth has not come from austerity. If you want to see what austerity does just look across the Channel to Italy, France, and, of course Greece. The UK has not demonstrated that austerity is a stimulus to growth.



Most of the commentary about George Osborne’s Fiscal Statement has been about the fact that the fiscal strategy is designed not for the long-term benefit of the British economy and hence its people but rather has a 50 days time target – to shore up political support for the Conservatives at the upcoming general election in May. That appears to be true.

But the more compelling aspect of the exercise from my perspective is that it continues the fraud that austerity worked.

In a blog from last week (March 10, 2015) – Lacklustre British economy all down to Conservative incompetence – I documented how the current recovery in the British economy is the slowest in 300 years of economic cycles.

I further noted in relation to the self-proclaimed status of the British Chancellor as the champion of austerity, that a major reason that the British economy is showing any growth at all is because Osborne was unable to inflict as much policy austerity as he claimed he would have liked when he set out in the June 2010 Fiscal Statement.

The on-going and rising deficits have supported spending in the UK and given it some life. Please read my blog – Who are the British that are living within their means? – for more discussion on this point.

We have more data today to validate that point.

The problem, however, is that the growth is being motivated by unsustainable growth in private credit – again. And if the projected spending cuts in years two and three of the forward estimates come to fruition, Britain will quickly return to recession.

Remember the British Chancellor of the Exchequer George Osborne’s second fiscal statement on March 23, 2011. The economy was still being supported by the fiscal deficits that the previous government had allowed to grow in the face of the crisis, which emerged in late 2007, early 2008.

On that day, the Chancellor delivered his – Fiscal Statement – and early on in that Speech he said that he was introducing:

… a Budget that encourages enterprise. That supports exports, manufacturing and investment. That is based on robust independent figures. A Budget for making things not for making things up. Britain has a plan. And we’re sticking to it … So this is our plan for growth. We want the words: ‘Made in Britain’ ‘Created in Britain’ ‘Designed in Britain’ ‘Invented in Britain’ To drive our nation forward. A Britain carried aloft by the march of the makers.

The following graph shows the total percentage change in each sector between the average of 2010 and the December-quarter 2014.

You can see that the ‘Makers’ are not marching much or for that matter making much with Total Production declining over the course of the Conservative government by 2.6 per cent while services have expanded by 10.6 per cent.

Taken from the previous peak, the construction and manufacturing sectors have still not recovered the ground lost during the downturn.

Within the services, it is Business Services and Finance that have led the way (15 per cent growth), reflecting the fact that when Osborne abandoned the austerity push in the 2012 Fiscal Statement as the British economy was going backwards again, the stimulus was largely given to the finance and real estate sectors.

It was clear that by 2013, the UK government had abandoned that strategy and instead were hoping that the housing sector would generate (temporary) growth. More about which later.

Please read my blog – The March of the Makers – out! – for more discussion on this point.

Sectoral Balances

The other missing reality compared to the Conservative narrative is the missing-in-action export led recovery.

Export growth has been pathetic over the last 4 years even and net exports have been negative since 2012. The Office of Budget Responsibility in its – Economic and fiscal outlook – March 2015 – states that:

The current account deficit remains wide by historical standards. It increased to around 6 per cent of GDP in the third quarter of 2014, the second largest quarterly deficit in National Accounts data stretching back to 1955.

The following graph shows the sectoral balances from the financial years 2000-01 to 2019-20, with the estimates from 2014-15 being the OBR projections inherent in the current Fiscal Statement.

For a tutorial on the balances framework please read – Sectoral balances – Part 1 and Sectoral balances – Part 2 and Sectoral balances – Part 3.

You can see that during the crisis the rise in the fiscal deficit (red line) as a per cent of GDP supported to the conservative strategy of the private domestic sector which went into surplus – partly because investment spending fell but also because the household saving ratio rose.

The fiscal projections show that that external deficit will converge at around 2 per cent of GDP (currently close to 6 per cent) and as the fiscal position goes into projected surplus, the private dissaving (overall) accelerates.

In other words, the growth impetus into the future from now is increased private sector indebtedness. This trend began in 2013.

It makes a mockery of the claims in the June 2010 ‘Budget Report’ that:

Over the past decade, economic growth in the UK has been driven by the accumulation of unsustainable levels of private sector debt and rising public sector debt.

The following graph shows the Household saving ratio as a % of disposable income after adjusting for pension equity from the March-quarter 1997 to the September-quarter 2014.

The ratio is now heaving back into the territory that preceded the GFC when Britain was bingeing on private credit and driving housing prices up.

That strategy will prove to be unsustainable.

According to the most recent British ONS – House Price Index – housing price inflation was -0.9 per cent in 2011, then rose to 1.6 per cent in 2012 and 3.5 per cent in 2013.

This ONS graphic – Comparison of regional house price indices before and after the financial crisis shows what has been happening in 2014.

The false austerity narrative

The following graph shows why the austerity narrative is a myth. The blue bars are the actual fiscal deficit as reported by the British – Office for National Statistics.

The red bars are the projected fiscal deficits that the newly elected Cameron government outlined in the – June 2010 Fiscal Statement.

The green bars are the projected fiscal deficits outlined in yesterday’s 2015 Fiscal Statement.

The planned austerity as at June 2010 which framed the Conservatives electoral appeal was by 2012-13 abandoned. You can see they were forecasting a balanced fiscal position by 2015-16 back then. The reality will be very different.

According to the projections in the June 2010 Fiscal Statement, the deficit should have been about £37 billion (see Page 72 of the 2010 fiscal documents). The current deficit is still around 4 per cent of GDP which is about £90 billion – that is £53 billion higher than it was projected to be about now.

That £53 billion is a large flow of spending that is supporting growth.

The ONS tell us that:

From April to December 2014, the central government net cash requirement (CGNCR) was £87.1 billion; an increase of £18.9 billion compared with the same period in 2013/14.

That is an expansionary fiscal move.

The self-employed trend

Then there is the employment story.

The following graph shows the growth in employment since the June-quarter 2010 (just after the Conservatives were elected) until the December-quarter 2014.

Total growth employees has been a miserly 5.8 per cent overall while the growth in self-employed and unpaid family workers has been 14 and 13.3 per cent, respectively.

The majority of the self-employed are working part-time. Many of these jobs are low pay and insecure. This is not a robust labour market despite the number of jobs that have been ‘created’ since the Tories took over.

Conclusion

I have not had time yet to fully consider all the nuances of the Fiscal Statement and the related research. I will over time have more to say.

But the overwhelming message is that the British government has been lying about its self-declared austerity champion status. It kept running deficits and then brought in spurious initiatives (like the Funding for Lending in 2012 and the 2013 housing subsidies) which allowed the economy to return to some modest growth.

That strategy is unsustainable and if you examine the projections for the next three years you will see that if the Government really does engage in a substantial fiscal shift to cut the deficit, the return to recession will come sooner rather than later.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.