Sorry for writing another Osborne-related post, but what else is there to do on such an Osborne-heavy day? Besides, I’ve just read the full statement that he delivered to the International Financial and Monetary Committee’s get-together in Tokyo — and something stands out from it. That something is the Chancellor’s apprehension about what’s happening in America.
This apprehension features in Mr Osborne’s list of “triple risks to the recovery” — the second item on that list is “the US fiscal cliff” — but he mentions it again, further on. Here’s the relevant passage:
“In the US, credible medium-term consolidation plans are still required and the authorities also need to deal with the immediate challenges of a potential fiscal cliff and further increases in the debt ceiling.”
This “fiscal cliff” has loomed ominously over American politics for several months now, but it hasn’t received much attention over here. It’s what will result from certain provisions in the Budget Control Act of 2011 (summarised here) coming into force at midnight on 31st December 2012. At that point, various spending programmes will be automatically cut, taxes will be hiked up and the deficit will be reduced.
You might wonder what’s so bad about something that ends with deficit reduction. But it’s not the goal that’s the problem, rather the effect of all this striking at once. The Congressional Budget Office forecasts that, if the current fiscal tightening programme kicks in at the very end of this year, the US economy will shrink by 2.9 per cent over the first half of 2013, and unemployment will rise to over 9 per cent by the end of it. And, of course, when the American economy quivers the rest of the world feels the tremors. The World Bank estimates that a “full-blown” fall from the fiscal cliff could push the Eurozone back into recession too (see, in particular, their scary table here).
What’s to be done? American politics, that’s what. It is now down to the Republicans and Democrats to wrangle over the various tax hikes and spending cuts, and strike a balance between growth and deficit reduction. The likelihood is that, whoever wins the Presidential election, we won’t see all of the fiscal policies primed for 31st December detonate in the end. But the political back-and-forth, in the meantime, is still likely to wreak some damage. The CBO reckons that US GDP might even fall by half a percentage point at the end of this year, as people react to any uncertainty by tightening their belts.
So, no wonder why Mr Osborne is concerned. We have seen some green shoots of our own recently — but, as the past few years have demonstrated, they can soon be mown down by powerful, external forces. Perhaps, in the end, that’s why the Chancellor didn’t really mention growth in his speech to the Conservative conference.