This year’s budget is less anticipated than others in the recent past. Strong economic growth towards the end of last year has blunted the sense of panic that has imbued this event since the global financial crisis of 2008 and, more specifically, the austerity budgets of the coalition government since March 2011. But the scars of 2008 remain and the UK economy is in big trouble with austerity and declining living standards here to stay. Below are five things about this year’s budget; a document which outlines a ‘recovery’ based on presumptions that, quite simply, aren’t going to happen
1. Low interest rates are setting the stage for another bubble just like the one that preceded the crisis of 2008.
Yesterday Mark Carney, the governor of the Bank of England, criticised the BoE and his predecessor, Mervyn King, when he said that its almost exclusive focus on low inflation meant it had failed to also keep an eye on financial stability. In other words the BoE had no problem stoking bubbles with low interest rates if that meant it also kept a lid on inflation. Interestingly enough Carney also pointed out that “It doesn’t take a genius to see that similar risks exist today”. He noted how risks were brewing because of the current period of of ultra-low interest rates – historically without precedent – saying that this could breed “potential complacency and excessive risk-taking” in financial markets. Sound familiar? Near 0% interest rates are necessary for any growth at all in the UK at the moment but they are also creating similar conditions which led to the last financial crisis.
2. The OBR is plucking numbers from the air on projected productivity gains (again).
The economy can grow for a while yet, especially if unemployment falls to 5-6%. Alongside big numbers entering work (and workfare) is however the unresolved (and often ignored) problem of falling productivity. If and when unemployment does fall as low as 5-6% productivity *will have* to increase for growth to continue. The Bank of England expects productivity (output per hour worked) to go up in the next quarter as does the Office for Budget Responsibility. Indeed the OBR is today saying that they anticipate 1.2% productivity growth in 2014 and 2.2% growth the following year. The only problem is that this’ is completely at odds with all the data since 2008 and all of the BoE’s predictions over the same period. Where do those numbers come from? My guess is that it’s a case of the OBR and the Bank of England collectively sitting on their hands and saying ‘productivity has to go up sooner or later, right?’
For more on why productivity matters for any prospective economic ‘growth’ check out this recent video we did for #NovaraTV
3. It’s also making ridiculous claims on future wage growth.
Sooner or later the Bank of England is going to have to increase interest rates. That will probably happen later this year and if wages are still not keeping up with inflation by then (as has been the case for the last six years), consumer demand – and growth – is likely to take a hit. If wages don’t grow this year and rates go up, even by half a percent, that has huge consequences for the economy. As I recently wrote on the LRB blog:
“Late last year the bank reported that average outstanding mortgage debt remains high, at £87,000, and that any rate rise not accompanied by an increase in real wages would cause serious problems. The number of households ‘most at risk of financial distress’ would double to nearly one in six if their mortgage rates went up by 2.5 per cent and their incomes did not improve.”
Wages have been in decline for six years. If it stays that way and interest rates begin to inch back towards their historical average (even that of the recent past) the government has big problems. Wage growth is now crucial and without it any increase in interest rates might prove politically difficult. Furthermore the projected increases in household consumption – around 2.5% between 2014-18 – make little sense if interest rates are going to go up even a few percent.
4. … and on exports.
The OBR expects export growth of 2.6% in 2014, rising to 4.7% in 2015 and 5.0% in 2016. In 2012 exports of goods and services increased by 1.1% (with imports increasing by 3.1%), while in 2013 that figure was 0.8%. That was in the context of reasonable global growth with the US and the BRIC economies seeing more demand than they probably will after 2015. In spite of that the OBR is projecting increases in UK exports not seen in the last several decades. That is all within a context where one of the UK’s biggest exports – oil – is seeing falling output. The projected numbers on UK exports – averaging around 5% over the period 2014-18 – is utter nonsense and without precedent. Seen alongside falling North Sea output I would argue it is impossible.
While industry surveys have been pointing to increased export orders for a while, Samuel Tombs, an economist at Capital Economics, claimed these have been “misleadingly upbeat . . . we would not place too much weight on them”. The OBR is making claims for the next half a decade on the back of confidence surveys and figures for very short period – it’s a bit like when your mate shows you a video of a 12 year old wonder-kid on YouTube saying they are going to be better than Cristiano Ronaldo.
5. …and yeah, on fixed investment.
Business investment is still 26% lower than it was in 2008 and while there was a dramatic increase in business investment in the final quarter of 2013 – 8.5% – that was the outlier in the data, not the norm. The OBR is now confidently predicting that kind of growth in business investment not just for the next three months, or even the next year, but all the way through to 2018. Compare that to 0.7% growth in business investment in 2012 or, worse still, the 0.5% contraction in 2013. It’s a bit like saying that your best striker scored a hat-trick in the last match of the season and is therefore going to score 150 goals next year. Clutching at straws doesn’t do it justice.
The UK, in spite of a massive currency devaluation in 2008, still has a major trade deficit and if there is any truth in this year’s budget it is the realisation that the UK is not going to become a net exporter any time soon. Alongside that massive trade deficit – and exports of goods fell in the three months to November last year – is a budget deficit of over £100 billion. The Treasury is now saying that that deficit will be eliminated by 2019 with a small surplus being run that year – a ‘return to normal’. This is of course complete nonsense: the UK has only run five budget surpluses since 1980 and that was with the bonanza of North Sea oil and the cash garnered from privatisation of, well, pretty much everything. It doesn’t take a genius to work out that budget surpluses – without outlandish projections of growth, investment and productivity gains – are impossible.
Final point. This data states that by 2020 households will be as indebted as they were when the economy tanked it in 2007/08. Less ‘march of the makers’ more march of the mickey-takers.