Middle-income tax increases, corporate tax cuts and below-inflation increases in maternity leave and housing allowances form the centrepiece of British Chancellor of the Exchequer George Osborne’s Autumn economic statement this week.
Osborne delivered more austerity but little relief as the Chancellor announced that the government would miss its fiscal deficit reduction targets, according to the independent Office for Budget Responsibility (OBR).
This means the UK Treasury will borrow an additional £100 million ($AUD153 million). Moreover, government debt as a proportion of GDP will not decrease until fiscal 2016/17, a year later than Osborne originally predicted.
Only weeks after ratings agency Moody’s stripped France of its AAA credit rating, Fitch warned that it would review Britain’s AAA rating following the next budget, due around March 2013.
Winter of discontent
In his statement, Osborne conceded that the Coalition’s austerity regime would need to remain in place until 2018, with the public sector shedding a further 300,000 positions, bringing the total losses to 1.1 million.
Growth for 2013 is forecast at a pallid 1.2%, up from -0.1% in 2012, the UK’s worst performance since World War II. But the British economy still risks a triple-dip recession.
Offsetting Osborne’s debt-reduction measures, the Chancellor also announced a corporate tax reduction to 21% and £5 billion ($AUD7.69 billion) in infrastructure investment.
When the Conservative-Liberal Democratic coalition came to power in 2010, UK debt as a proportion of GDP was 52%. Now it’s 67%. (October 2012). Mind you, debt was worse when the Queen was crowned in 1953 (around 125%), and Britain was still on the ration.
Middle-income earners will also pay for the costs of Britain’s deficit reduction strategy; over 400,000 Britons are expected to fall into the 40-pence income tax bracket. Middle-class welfare is clearly as fashionable as a Savile Row suit at Woodstock right now, as Nick Clegg’s Liberal Democrats failed to convince Treasury that childcare costs needed increased subsidies.
Not satisfied with that, the Chancellor recently started a war of words with British teachers, as the government considers performance pay based upon pupils’ results.
Europe: catastrophe postponed
Meanwhile, the EU is deep in labour migration negotiations that could allow European companies to import labour from developing countries, which bears some resemblance to the issuance of 457 visas for temporary workers in Australia.
As the BBC reports, Britain could take up to 12,000 Indian migrant workers, if the EU-India talks achieve a consensus on the numbers. That should keep the UK Independence Party and the British National Party preoccupied for quite some time. Not that the UK Trade Union Congress is exactly cracking open the Mouton Rothschild ’61 over the idea either.
Their unexpected ally is London Lord Mayor Boris Johnson, who this week called for a “pared-down” relationship with the EU, arguing Britain should remain within the European single market, but withdraw from the objectives of fiscal, monetary and political union. Instead, Johnson wants Britain to forge closer links with non-EU members such as Norway and Switzerland. For readers with long memories, this sounds suspiciously like Britain’s European Free Trade Association (EFTA) initiative of 1959-60, formed as a rival to the (then) European Community. And Boris should know — he was Brussels correspondent for the Telegraph in a previous life. EFTA does remain in existence, albeit heavily integrated into the EU single market, but its membership now fits comfortably in a photo booth: Switzerland, Norway, Iceland and the Grand Duchy of Liechtenstein.
Some economists may agree with Boris. Britain’s second recession since 2008–09 has been blamed, at least in part, upon the sluggishness of the Eurozone economies, as the EU formally went into recession in the September quarter, and retail sales on the continent tanked.
The result could have been worse. Despite the recession, Eurozone exports rose in the third quarter, while Spain, Greece and Portugal saw cuts in imports while exports increased, with Greece recording an impressive 11% rise through September 2012 (although Athens still had a Q3 trade deficit of €400 million).
But these figures belie the fact that EU exports fell 1.1% in September, while weak domestic demand in the Eurozone largely accounts for the €9.8 billion trade surplus.
The sick man of Europe
The outlook for British growth in 2013 is tepid, with the UK economy likely to grow at a molasses-like 1.6%, behind Germany (1.9%) but ahead of France (1.3%), according to the OECD’s Economic Outlook The OBR predicts a fractionally more modest 1.2%. This assumes that Britain will stage a modest recovery on the back of a mild revival in global growth in 2013.
In 2012, even as the Eurozone stabilized, the UK still went into recession despite the fillip the British economy received from the Olympics and, presumably, the revenues of Skyfall.
Meanwhile, the UK Treasury needn’t look to the London financial sector for solace. November proved the worst month since the crisis for City recruitment, with a year-on-year 33% fall in new jobs. The City may even lose its much-vaunted position as the world’s pre-eminent financial centre to Hong Kong, if global markets remain stagnant.
U-turn if you want to
In 1980, Margaret Thatcher implemented savage cuts that saw unemployment ramp up as public spending fell markedly. It was the Conservatives’ response to the “winter of discontent” that was characterised by persistent strikes during the final months of James Callaghan’s premiership.
“The lady’s not for turning,” Mrs Thatcher declared, although her austerity regime led unemployment to peak at over 3 million in 1982, the worst figure since the 1930s Depression. In 1983, she faced the electorate after victory in the Falklands War. Somewhat ironically, it was Labour under Michael Foot, whose manifesto — the “longest suicide note in history’ — declared Britain would withdraw from the EU. Fun fact? Tony Blair, facing his first election in 1983, also signed that manifesto.
George Osborne is made of less stern stuff. Expect softer, more expansionary budgets in 2013/14, as the next general election approaches, with a moderate return to middle-class welfare. Such are the tight numbers between the two major parties (and the uncertain position of the new kingmakers, the Lib-Dems), coupled with the unpredictability of recession politics in contemporary Europe that every incumbent government is – potentially – a sitting duck. Berlusconi. Sarkozy. Zapatero. All gone. Merkel, Cameron and Clegg may be next. Voters have shown no quarter to European governments since the 2008 world financial crisis tore a gaping hole in the global economy.
In other words, Osborne will turn. In 2013. At least 90 degrees. He has no alternative, if only to avoid a triple-dip recession. A three-strikes recession and the Coalition is out.
And now, the worse news
Not really news, as the Office for Budget Responsibility issued this warning in July. But it’s sobering nonetheless: Britain’s public sector debt position is "clearly unsustainable” over the next 50 years. In 2011, the Office predicted the public sector deficit would be 107% of GDP in 2061/62 – not good news for Gen Z, who would be planning their retirement. (All of us reading and writing these mind-boggling forecasts right now will be at least six feet under by then, of course. If you’re Gen Y, you’ll be grasping at your now-non-existent superannuation.) The Office’s slightly less pessimistic forecast in July 2012 was public sector debt at 89% for 2061/62.
For those of us thinking that far ahead, let’s quote one of Britain’s nearest and dearest enemies, Louis XV (1715–1774): “Après moi, le déluge”. Or, if you prefer Anglo-Saxon morbidity, there’s John Maynard Keynes: “In the long run, we are all dead.”