This week on ConservativeHome, we’ve been asking the question: is the Chancellor achieving the rebalancing he wants? We’ve already had answers – and very smart ones too – from Michael Martins and Steve Hughes. Now it’s my turn.

Except I’ve already had my turn. I wrote a piece towards the end of last March on George Osborne’s progress towards rebalancing the economy. It marked him according to his own criteria: in the Mais Lecture that he delivered in 2010, before becoming Chancellor, Osborne spoke of a “new economic model” that eschewed the credit craziness of the New Labour years, preferring the solidity of savings, exports and manufacturing. My piece concluded that this new model hadn’t yet been completed.

Rather than just republish the same article (which would be lazy) or write an entirely new one (which would be too much like hard work), I thought I’d do a mix of the two. Here are some quotes from what I wrote last March, along with brief comments to account for what’s happened between then and now.

The public finances


“It barely needs saying any more that the national debt has risen, from about one £trillion to almost one-and-a-half £trillion, over the course of this Parliament. It would have done so even if the Chancellor had met his expectations for borrowing, but he didn’t. He’s set to borrow £90 billion in this current financial year alone. The original forecast was for £35 billion.

This may not seem like a good first entry on Osborne’s scorecard, but there’s another way of looking at it – and it is, in fact, how I prefer to look at it. The Chancellor fiscal plans were upset by the sluggishness of the economy and the tax revenues that emerge from it, yet he still delivered the spending cuts that he promised. That’s why the Government is borrowing £50 billion less this year than it was at the start of the Parliament. The necessary rebalancing has begun, even if it hasn’t yet tipped the public finances into surplus.”


Of course, according to the Office for Budget Resposibility’s latest forecasts, the national debt is still rising as a cash sum – to £1,715 billion in 2020-21. And it’s doing so because the deficit persists. From the current total of £73.5 billion in 2015-16, the Government is expected to keep on borrowing, by declining amounts each year, until 2019-20. In this respect, the story hasn’t changed: Osborne is bringing the public finances into surplus, albeit more slowly than he originally intended.

What has changed is the reason for that slowness. In the last Parliament, as I observed last March, the Chancellor’s deficit reduction plan was spoiled by a weak economy and subdued tax revenues. Now, in this Parliament, the Chancellor’s deficit reduction plan is being spoiled by the Chancellor himself. The Office for Budget Responsibility found an extra £27 billion for him ahead of November’s Autumn Statement – but Osborne decided to spend most of it, rather than use it to reduce the deficit. This is much less forgivable.

Politics has brought about this change. Osborne can wave money at the voting public because, against Jeremy Corbyn’s Labour Party, the Conservatives are never going to be regarded as the dangerously profligate ones. But, as I suggested last week, he still ought to be careful. When the Chancellor is warning of risks to our economy, he can’t really afford to take any himself.

Personal debt


“The problem for Osborne, and the rest of us, is that the national debt isn’t the sum-total of it. There’s also the debt that we accumulate as individuals. According to the Bank of England’s latest figures, the amount of unsecured debt in the country is £168 billion. That’s less than the £208 billion that we put on the never-never in September 2008, although there are signs that it’s on the rise. Only last November, the amount of new borrowing on credit cards, loans and overdrafts hit a seven-year high.”


Or, as I put it in a To The Point post last year: our main debt problem is a household debt problem. The current sum of all household debt is £1,780 billion, which exceeds the national debt by £181 billion, and the OBR expects it to rise ceaselessly to £2,407 billion in 2020-21. Of this, according to the Bank of England’s latest figures, about £178 billion is unsecured consumer credit; still not as high as it was in September 2008, but rising faster than at any other time since the crash. In a way, this is a sign of economic confidence: we’re getting out there and spending. In another way, it’s the return of some worrying old habits: much of that spending is being put on plastic. Will these indebted households and individuals be able to cope when interest rates rise?



“The corollary of this is, of course, savings. British workers now put away only 10 per cent of their incomes, which isn’t just lower than the 14 per cent total from 2010, but also lower than most other countries in Europe. Even the bedraggled economies of Italy, Spain and Portugal manage savings rates of between 11 and 15 per cent.”


The figure that I used in this passage came from a Daily Telegraph article, and I’m no longer sure about it. The standard metric for these things, the savings ratio, which shows the amount of post-tax income remaining after all household expenses, was and is currently around the 4-5 per cent mark, not 10 per cent. Although there was once talk that a statistical revision would see Britain’s savings rate doubled, so perhaps that explains it. I dunno.

In any case, it remains true that Britons don’t save as much as their continental cousins, and haven’t for some time. This is as much a cultural problem as an economic one, which makes Osborne’s rebalancing act even trickier. Cultures are difficult things to change, even when all the conditions are right. But changing a culture of spending into one of saving, when interest rates are at record lows? Ha!



“Brits are borrowing to spend again, but they’re spending on goods from abroad. Imports from the EU totalled £17 billion in January, some £6 billion higher than our exports. For countries outside the EU the gap was another £4 billion. Which it to say, we are still and consistently a net importer – and it’s getting worse. The Office for Budget Responsibility, in its latest set of forecasts, writes gloomily of a ‘gradual decline in export market share’. They reckon that net trade will actually make a ‘small negative contribution’ to economic growth in each year of the next Parliament.”


In a To The Point post last year, I began with a knee-shaking fact: the past 15 years have delivered the 15 largest trade deficits in Britain’s history. Nothing has happened since to lift us from this tangled patch of history. The total monthly trade deficit in goods still clings insistently to the £10 billion mark. The OBR still reckons that trade will subtract from our economic growth in this Parliament. And as for the challenge that Osborne put to companies in his 2012 Budget, to increase their annual exports to £1 trillion, they’re still only halfway there and unlikely to go much further. Part of the problem, as Francis Maude admitted a few days ago, is that “world trade is shrinking” at the moment. Any targets, however well-meaning, are being dragged further off into the future.

Services versus manufacturing


“…manufacturing is now growing slowly, but it’s still some way below its level at the beginning of 2008. The only sector to have exceeded that level is, predictably, services.

Oh yes, services. They account for around three-quarters of our growth, and four-fifths of our jobs. Britain is very much a service economy – and what service would you like? We’re still pretty good at the financial ones, which account for 8 per cent of the value in our economy. But we may have become stronger at others. According to a paper that PricewaterhouseCoopers published at the end of 2013, jobs and money have gone across to ‘professional, business and support services and the health sector.’ They cast it as a rebalancing of the services sector within our economy.”


Handily, the Office for National Statistics produces a graph, on page 8 of this PDF, showing how various sectors of the economy are doing relative to the first quarter of 2008. The services sector? It’s still on the up and up, the only one to have surpassed its pre-crash peak. Whereas, since last March, growth in the manufacturing sector hasn’t just slowed, it has started retrenching. For a sector that relies on exporting its wares to the rest of the world, the prospects aren’t looking good.

As Michael Martins argued on this site on Tuesday, the dominance of the services sector “is not necessarily a bad thing” – perhaps Britain should accept its strengths and come to terms with its weaknesses. But weaknesses can affect the economy as a whole, they can leave people out of jobs, they can leave areas reeling. When it comes to manufacturing, the current Chancellor might face a choice that will surely trouble his successors: prop it up, or watch it decline?

Northern Powerhouse


“And on to a Northern Powerhouse? It’s telling that Osborne mentioned better transport links between northern cities in his very first Budget speech, just as he did in his last one. These projects take a long time to deliver, and many are planned for the fogbound period of the next Parliament. That means they may not happen if Labour are returned to power. They might not even if the Conservatives are.”


There are so many strands to the Chancellor’s Northern Powerhouse that it is difficult to pull them together in one paragraph. For all of them, though, we have moved from the Parliament of Promising to the Parliament of Doing – and that doing could prove more difficult than the Chancellor had us believe. Even Margaret Thatcher found grands projets a struggle. Her Roads for Prosperity plan, announced in 1989 as the “biggest road-building programme since the Romans,” ended up coming to very little in the face of political and public opposition. Look out, in this Parliament, for whether deadlines and budgets slip.



“Some parts of the economy have changed beyond hope and expectation; some are still as they were, or worse; but others could fall either way, depending on what happens next. Will the prospect of higher interest rates encourage more saving? Will it stretch thousands of borrowers to breaking point? Will it strengthen the pound and diminish our exports? Will all of this happen? Or none of it?

It is unsatisfying to finish with so many questions, but economies are complicated things. I haven’t even mentioned the housing market or the welfare reforms. There’s too much for one blog-post, and indeed too much for a few years of legislation. A truly new economy takes longer than one Parliament.”


Yep, that’s still about right. See you all in 2020.

17 comments for: Peter Hoskin: Osborne’s rebalancing act continues. It may never reach the desired conclusion.

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