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Finding the elixir of growth
Connect’s Senior Policy Consultant Andrew Smith looks at what Chancellor George Osborne will be looking to deliver in next week's Autumn Statement.
November 2011 - Connect Intelligence Briefing
Treasury Ministers and officials will have been busy over the weekend looking at drafts of the Autumn Statement and making final adjustments. The contents of the statement will be a mixture of announcements from the Government on tax and spend changes, in addition to an update of the office for Budget Responsibility's growth forecasts.
It is expected that these OBR forecasts will contain the grimmest news about expected growth in the economy. The forecasts are likely to suggest, despite the Government's commitments to austerity, the Chancellor is unlikely to achieve his aim of eliminating the structural deficit by 2014/15 and will struggle to reach his fallback target of 2015/16. This will mean that the Government's hopes of easing off on austerity measures and, perhaps, being able to hold open the possibility of tax cuts before the next election seem dashed.
The reasons for these expected OBR forecasts are twofold. The first is that weaker growth will dampen tax revenues, but most important will be the OBR's judgement of what part of the deficit is structural and expected to come back into balance once recovery happens, and what part is a sign of more fundamental imbalances in the UK economy. It might be that the OBR's assessments are too bleak, but after placing an independent fiscal watchdog at the centre of his economic strategy, the Chancellor will be in no position to ignore their advice.
The key questions that the Chancellor will have to answer when he gets to his feet on Tuesday are what are the reasons for the weakness of the UK economy and, most importantly, what he is going to do about it.
Ed Balls’ response to the statement will no doubt claim that the Government has cut the deficit 'too far and too fast' and has therefore sucked demand out of a weakened economy. He is also likely to prescribe a nurturing mixture of temporary tax cuts and spending increases.
In response, the Chancellor will point to the crisis in the eurozone and very high commodity prices as the reason for weak growth and higher than expected public spending. This assertion seems to be backed up by the most recent eurozone forecasts, which predicts a slide back into recession next year whilst the UK economy is expected to flat line.
We can expect the Government side of the chamber to make as many references as possible to the situation on Thursday when yields on UK German gilts fell lower than German bonds, underlining the market's confidence in the UK's ability to deal with the deficit and the Government's claim that the UK has become a safe haven in the midst of the eurozone storm.
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