George Osborne will today warn of major global economic uncertainty by claiming that 2016 opens with a dangerous cocktail of new threats. We have heard similar warnings in the recent past – only 14 months ago David Cameron was highlighting the “red warning lights” on the dashboard of the global economy. However, George Osborne’s analysis is right, and he is also correct in emphasising the continuing importance of fixing the UK’s public finances.
The emerging market slowdown, in particular, poses a high risk to the health of the global economy. China’s growth rate has plummeted in recent years, falling from 12% in 2010 to less than 7% currently. The fall in the Chinese stock market will also add to fears about the growth prospects for emerging economies.Closer to home, the Euro crisis persists. Despite the Euro area finally reaching economic growth, many member countries continue to face problems. Recent data suggests that Greece, Estonia, Finland and Denmark are now in negative growth. Moreover, the Euro crisis will flare up once again next week, when the Greek parliament attempts to push through reforms to a pensions system that is on the verge of collapse.
Unfortunately, Osborne’s cautious message in the New Year appears to be at odds with the one he gave at the Autumn Statement, where he dramatically softened spending cuts on the back of improved forecasts given by the Office for Budget Responsibility As was highlighted in the CPS Autumn Statement Economic Bulletin, this has left the Chancellor with very little room for manoeuvre if he wants to hit his public spending targets.
Along with the global risks, recent borrowing figures will be of concern to Osborne. In November 2015, for example, borrowing was up £1.3 billion compared to the previous year, according to the Office for National Statistics. The figures were affected by one-off factors – including a number of bank fines being paid to the Treasury in November 2014 – but there is no doubt that the Chancellor may now struggle to meet his targets for this financial year.
George Osborne was right to make changes in his Autumn Statement. Withdrawing his plans on tax credits and increasing expenditure on police forces were both necessary. However, these increases in public spending should have been offset elsewhere – particularly from the ring-fenced areas of international aid and pensioner benefits.
If the Chancellor is right that global uncertainty poses risks for the UK economy, tougher spending restraint will be required to achieve his budgetary targets.