Wednesday, 9 January 2013

The government's mid term review: deficit reduction

Yesterday the Government published  the "Midterm Review: Programme for Government Update." This was intended to be a comprehensive assessment of progress against the commitments made in the original Coalition Agreement.  The Prime Minister said that this "audit" would be "full, frank and unvarnished."   Naturally, I was particularly interested in how the Review described progress in deficit reduction, particular, given my view (set out here) that the Government has effectively abandoned its initial "Plan A" for deficit reduction.   

Here's what the Review says:


"We will significantly accelerate the reduction of the structural deficit over the course of a Parliament"

What we have done

"We set out proposals in the June Budget 2010, Budget 2011 and 2012 and Spending Review 2010 to accelerate the reduction in the structural deficit."

Proposals? Yes, but what actually happened?  This would seem to be an occasion where a graph is worth, if not a thousand words, at least considerably more than a sentence of bureaucratic process that doesn't actually say anything.  

So the graph below shows the Office of Budget Responsibility's forecasts for the structural deficit (the cyclically adjusted current budget deficit, that is the deficit excluding investment spending and taking account of the economic cycle) before the June 2010 Budget, and after the 2012 Autumn Statement. That is, taking account of all the "proposals" mentioned above, as well as everything else that has happened in between.

Let me be clear. I am not criticising the government for their failure to "accelerate the reduction in the structural deficit".  Quite the opposite.  I have argued repeatedly that even this pace of fiscal consolidation has been too fast, and, as the Director of the Fiscal Affairs Department of the IMF put it last week:
 "fiscal adjustment should not be would be preferable to postpone fiscal adjustment altogether until some future time in which there is too much private-sector demand rather than implementing it at a time when there is not enough private-sector demand."
If the government had tried to actually fulfil its commitment, the UK economy would be in considerably worse shape.  So a genuinely "unvarnished" assessment might have read something like this:
"Reduction in the structural deficit has proceeded at much the same pace as forecast before the fiscal consolidation programme was announced.  We took the view that attempting to accelerate this reduction would have done substantial and unnecessary economic damage, as has been the case in a number of eurozone countries. Like the IMF, we have changed our minds on the wisdom of front-loaded fiscal adjustment.  Fortunately, our ability to borrow in our own currency means that we have the flexibility to delay."
I would still argue that the pace has been too fast, and that the very large cuts to public investment (which does not impact the structural deficit in any case) were wholly misguided.  But we should at least give the government credit for not making things even worse - which a misguided attempt to stick to the original plan undoubtedly would have. 

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