John Redwood is the Member of Parliament for Wokingham and Chairman of the Conservative Economic Affairs Committee. Follow John on Twitter.
This is the sixth in ConservativeHome's series of posts counting down to the Autumn Statement. On Tuesday, Tim Montgomerie said that George Osborne's economic narrative is taking shape. On Wednesday, Peter Hoskin urged Mr Osborne to ditch his current fiscal rules, and Tom Frostick argued that the Chancellor must target wealth. And, yesterday, Andrew Lilico set out some of the international risks for the UK economy, and Paul Goodman called for an Affordable State.
I am a big fan of the original plans the Coalition sketched in the heady days of June 2010. They said they had come together to eliminate the large structural deficit they inherited from Labour. They would tame it, primarily by cutting spending plans, with just 20% of the reduction coming from more tax revenue. It was a great idea. Past experience here, in Canada, Sweden and elsewhere shows it can work. The UK state was spending and borrowing too much. Growth would come from more rapid private sector expansion, fuelled by a sensibly loose money policy. It is still the right way to tackle the problems of the UK economy.
So what went wrong? Why have we had a double dip recession and so little growth? The Coalition did not do what it said. Instead of reducing planned spending to curb the deficit, they put up current spending in the early years of the strategy. Instead of keeping taxes at realistic levels, they put through tax rises or kept most of Labour’s late tax rises, giving the UK less competitive tax levels on employment, income and effort. They did with the Bank attempt an easy money policy, but the broken banks and the fashion for high prudence in regulation meant little of the newly created money found its way into the private sector to promote growth.
In the 2010 Plan they forecast 13.2% growth over the five years of the Parliament. By the time of the 2012 budget this had slipped to forecasting 9% growth for that time period. In the 2010 Plan they aimed to borrow an additional £451 billion over the five years. They increased this to £556bn in this year’s budget. Tax revenues, which were meant to surge from £480 billion in 2009-10 to a massive £656bn in 2014-15, have been revised down to a forecast £633 bn in the budget. Current spending has continued to rise as planned, from £600bn under Labour to around £690 bn by the end of this Parliament.
So what will the OBR bring us in the Autumn Statement? I fear it will have to make further downward revisions to forecast growth. This will mean forecasting lower tax receipts. Fortunately, the economy has been generating a lot of extra jobs, so benefit payments to the out of work need not rise. The UK has to get better at fitting the unemployed to those jobs so that a higher proportion of them are taken by people already settled in the country. Attention will foolishly focus on planned public spending and borrowing after 2015, as commentators concentrate on if and when the amount of debt as a proportion of the economy starts to fall.
This is all rather arcane and academic. I will concentrate on what they think will happen for the next couple of years. Forecasting the immediate future should be easier than the more distant. The economic and political future of our country will be determined by what happen during the next two years, not by what this government says it might do after 2015. Few want a Coalition government after 2015, and no one will be campaigning for the Coalition in the next General Election, so what they think about budgets after 2015 is not very interesting.
Everyone agrees we need more growth. The aim of the Autumn Statement should be to give growth a good boost. They way to do that is to go back to the original strategy. Get better at limiting the growth of current public spending. Get better at driving productivity improvements throughout the public sector. Limit borrowing more. Sell assets. This has to be combined with easier money, which means sorting out RBS and the other damaged banks. We will not have a rapid and welcome rate of recovery until we have sufficient functioning high street banks capable of financing the recovery. The best course is to split RBS up, and float off some functioning UK banks from its portfolio in time to do something positive.