Accelerating the pace
As usual, the most interesting thing about the chancellor’s autumn statement was the accompanying report from the Office for Budget Responsibility. There was no political gain to be had from any significant policy announcements made now. Promises of tax cuts do remain on the agenda, though driven by a shrinking state since the government still has little idea about how to promote sustainable growth. There was no surprise that the OBR raised its forecast GDP growth rate for this year to 1.4 per cent, from the low 0.6 per cent it had estimated in March. The OBR acknowledged that when economies turn, forecasts can overshoot and have to play catch-up with what the economy is actually doing. That rather undermines their utility, of course, and the OBR could have taken a more positive view nine months ago. Since then, businesses have become more optimistic and have increased activity as a result.
However, the OBR is keen to state that it is more pessimistic than most on the economy. It has revised down slightly its growth estimates for later in its forecast period. It has also decided that the growth we are seeing is due to a cyclical upturn, stating that, compared to its March report, ‘the downward revisions to our borrowing forecasts reduce the overall budget deficit but not the structural deficit’. The OBR is saying it still believes the UK has a lower trend rate of growth post the financial crisis than we did before 2008. It points out that while it forecasts growth for next year and beyond, the growth rate we are currently seeing is likely to fall.
The OBR is looking for an improvement in productivity. The growth we have seen so far has been driven by lower saving rather than a rise in incomes. Wages are still falling behind inflation, for example. Housing investment may have increased, but business investment remains lacklustre and Britain’s trade performance has not delivered as the OBR expected. As the Financial Times highlighted, the OBR notes that ‘Ultimately, productivity-driven growth in real earnings is necessary to sustain the recovery.’ It could be that the expansion of the financial sector before the crisis gave us the impression the UK was more productive than it actually was. Alternatively, the statistics may not be measuring productivity accurately at the moment. The outlook for productivity is the great economic unknown in the UK.
Labour has felt a bit on the back foot as the economy has recovered. Though almost certainly true, it has been difficult to argue that things could have been better if a more pro-growth economic policy had been followed. Most people remain to be convinced and it feels like a debate about the past, though one which may become more relevant if the recovery is not sustained. To win the argument, Labour needs to continue its work building solid economic credibility, and indeed it must accelerate the pace. We need to be clear in our own minds why the financial crisis happened, why government borrowing rose sharply, and to what extent we had spending and deficits under control prior to the recession. It should have come as no surprise that the economy has picked up. That is why Labour has needed a message that applied not just to the present but to the future too. The OBR itself has stressed that a sustainable improvement in living standards requires productivity growth. That is why Labour needs to keep ownership of the cost-of-living agenda by being the party of investment with answers to the challenges we will face in 2015 and beyond.
This article was first published by Progress
on 6 December 2013.