Norman Lamont, Conservative chancellor in the early 1990s, was fiercely attacked in some of the tabloids for discerning too soon the “green shoots” of economic recovery. Although we are again seeing a few sporadic green shoots now, I do not expect the current chancellor, George Osborne, to use this phrase in his Budget speech on March 21; but it would be a mistake to ignore these signs altogether.
The Purchasing Managers Index, for instance, suggests a return to modest growth in the first quarter of 2012. The inflation rate is dropping quite fast; the worst of Mr Osborne’s tax increases lie in the past; and despite his warning against expecting a tax-cutting bonanza, the fiscal position may look slightly better than forecast. Even the labour market is showing a few signs of life. Abroad, the European economy as a whole is so far no worse than on hold and the US is clearly on an upward slope, if not as steep as the Obama administration would like.
My very first piece of extended analysis of the Treasury had a chart with arrows showing governments first deflating in the face of recessionary symptoms, then giving the economy a boost when it was already on the way up. It is not that Treasury economists were stupid then or more recently. It is that their analysis has been swept away by financial fetishes. Earlier, it was the sterling exchange rate. More recently it has been the supposed need to reduce the budget deficit more quickly than Labour planned to do.
Talk about whether the UK has escaped or will escape a double dip recession is unacceptably superficial. What matters is how far UK output is below a sustainable trend. When Franklin D. Roosevelt launched the New Deal in 1933 he did not ask whether output would dip slightly further from the bottom of depression levels. On the last count UK real gross domestic product was some 12-15 per cent below the trend established up to the banking crisis. The anti-Keynesian camp argues this trend was unsustainable as it was based on a financial bubble. For this and other reasons the Office for Budget Responsibility has put its central estimate of the “gap” between actual and potential output at only around 3 per cent. But other analysts disagree: the Institute for Fiscal Studies puts it at 6 per cent and the National Institute yet higher.
On the day, the overall thrust of the budget is usually obscured by a vast number of specific revenue and expenditure decisions; some good some bad, many just an unnecessary nuisance. In the background is a pernicious, outré economic theorem known as the “balanced budget multiplier”. This arises from economists who have given up the attempt to persuade governments to take an adult view of the Budget and look instead for balanced tax and expenditure changes that will induce households and businesses to spend more. If this is combined with a conventional tribute to the National Savings Movement we should reach for our sickbags.
And while on the subject of fallacies, the manufacturing lobby has come to life again. The greater part of the economy, however, is neither manufacturing nor banking. Though it goes against David Cameron’s Heathite grain, the government’s job is not to pick winners but, in the words of the official cliché, to create “conditions favorable to growth”.
However much it is drowned out on the day by specifics, the overall Budget judgment does matter. The Chancellor would be justified in introducing a neutral budget, if and only if, he is prepared to come back with further measures if his judgment is wrong. Denis Healey was wrongly mocked for the number of mini packages he presented. Yet there is absolutely no reason why the economic course should be set only once a year. There is a pragmatic argument for leaving mid-year adjustments to monetary policy. But this is difficult when interest rates both in the UK and abroad are scratching zero. The reservation about the Bank of England and Fed’s policy of quantitative easing is not that it is “printing money”, which it should be, but the old argument about the usefulness of “pushing on a string” when activity is depressed. We cannot wait for that argument to be settled, if it ever is.
Amidst the noisy discussion of whether the government should have a Plan B, it should not escape notice that Plan A has been substantially modified. The coalition’s deficit reduction target has been pushed out a year and it has wisely not tightened policy to meet its original projection, conveniently blaming uncertainty in the eurozone. We are clearly already following a Plan A minus; at least a small improvement.
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