A considerable number of Government policies continue to be announced ahead of the Autumn Statement tomorrow. We’ve already heard about reforms (or in many cases, consultations) on employment law. We’ve heard about the shift of £5bn from current to capital expenditure, and attempts to utilise pension funds to invest in infrastructure projects. Though lacking in detail, we’ve learned that the Government’s credit easing scheme will entail the Government underwriting capital in wholesale markets in an attempt to drive down borrowing costs. And we’ve also heard about plans to re-introduce a less costly version of something which looks like the Future Jobs Fund.
The fact that we’ve heard so much already should intrigue anyone with a keen interest in our economic health. It’s likely that the Government is expecting such a dire set of forecasts from the Office for Budget Responsibility (OBR) that it is trying to generate at least some ‘positive’ news stories beforehand. But many of us still hope (but don’t expect) that the actual reason for the seepage of micro measures is that the Chancellor has some major policy announcements up his sleeve, and is trying to clear the decks so that they receive the coverage that Osborne desires.
A joint IEA/TPA briefing this morning outlined the two key challenges the Government faces: to maintain credibility for its fiscal mandates and to deliver policies to stimulate the long-term growth rate of the economy.
There has been some suggestion in the media that Osborne intends to outline that his plan to eliminate the cyclically adjusted deficit is a ‘rolling’ five year target, allowing him to claim that he is still committed to it even if the actual deficit targets laid out at the last Budget are not met. This, as Andrew Lilico has correctly asserted, would be a monumental cop-out and risks destroying Osborne’s credibility as Chancellor.
But even if this sleight of hand is attempted, the Government has still also committed for the debt to GDP ratio to be falling by 2015/16 – which should require the Government to keep on top of the public finances.
As we outlined in the first of our Growth Bulletins, Osborne should remain resolute and make clear that he is sticking to the deficit targets that he has already laid out. This will help maintain market confidence, even in the face of a worsening outlook for growth.
But there are measures that he could take even within that deficit framework.
He could, for example, fund tax cuts through further cuts in non-departmental spending - rebalancing current tax and spending priorities to cut the cost of employment, attract inward investment and ease the burden on families.
The key to making his plan more credible, however, is to do whatever it takes to increase the long-run sustainable growth rate of the economy, which is likely to be reduced significantly in the OBR’s outlook.
Incentivising work and making labour markets efficient is extremely important. But what has become particularly clear is that many small and medium sized enterprises in particular are being burdened by excessive taxation and regulation. Reforms to employment legislation and specific deregulation for small enterprises are therefore vital, as is the need for credit to be available (a long standing issue) for these businesses as the economy recovers.
The availability of reasonably priced energy should also be addressed, and the Government must abandon plans for a unilateral carbon price floor which would kick in in 2013.
Ultimately, there are two key questions which should be used to determine whether Osborne’s Statement tomorrow is successful:
1) Is the Chancellor still committed to doing whatever it takes to eliminate the structural deficit by the end of the Parliament?
2) Has the Chancellor been equally committed to significantly improving the long run sustainable growth rate?
Governments don't have all the answers. But to maximise our economic prospects, let’s hope the answer to both of the above questions is yes.