British budget reflects weaker than forecast economic growth

The autumn budget statement by Chancellor of the Exchequer George Osborne was shaped by the weak growth in the British economy, signalling a continuing period of austerity for Britain. Osborne has stuck to his strategy of cutting government spending and raising taxes, in a 80:20 ratio, which has been the main plank of his economic policy and David Cameron's coalition government policy since they came to power in May, 2010. The British economy has taken a buffeting over the past year, and it has slipped back into recession. Growth this year is estimated to be -0.1 percent by the Office for Budget Responsibility (OBR), the independent body set up by the government to oversee economic forecasts. The failure to reach those figures lies behind Osborne's need to cut spending further. Part of Osborne's hopes for a recovery in the economy were built on increased exports. The European Union (EU) and eurozone nations are Britain's largest export markets. The OBR expected exports would add 0.8 percentage points to economic growth from Q4 2011 to Q3 2012. However, exports contributed -0.3 percent to growth. BUDGET "FAILS TO DELIVER" With such a weak performance and an economy that looks at best becalmed, has Osborne done enough in his autumn statement to change circumstances for the better? Xinhua spoke to Jonathan Portes, the director of the National Institute of Economic and Social Research in London and a former chief economist at the British Treasury, who said that Osborne's budget had failed to deliver. "In terms of the macro-economy, Osborne's statement is unlikely to make any difference to growth in the short to medium term; in that sense I think it is a missed opportunity," said Portes. He stated there were useful elements in the autumn statement, but "overall it is not going to make a huge economic impact." "It seems that we have had almost no growth over the past two years and the OBR is projecting only one percent growth next year, which is below the sort of growth we need to see for a sustained recovery. So, it is the main problem facing the economy at the moment," he added. However, the autumn statement would not affect Britain's ability to borrow money, said Portes, so there is no likelihood of a sovereign debt crisis over the horizon. But chancellor Osborne had set himself two significant targets for his economic policy. The first rule, and the one he has now abandoned, is that public debt as a share of national income should fall by 2015-16. There was trouble for Osborne too with his second target -- to get public spending under control by 2016-17. Driven by the below-forecast performance of the economy this year, receipts over the coming five years is forecast to be lower, with the effect that borrowing will be up and Osborne must find something to fill the gap. Osborne has moved that target back by a year, for the second time, so that he is forecast to hit it in 2017-18. For Portes it is clear evidence that Osborne tactics of cutting government spending early and hard had not delivered. "You need to grow your way out of debt and deficit, that is what history tells us, and the best way to grow your way out of this is to have significant higher deficit in the early years and then a much sharper consolidation later on," said Portes. WELFARE CUTS Osborne was creating more trouble for the economy, said Portes, by cutting welfare spending in real terms over the next three years with an annual one percent increase in benefit payments. Inflation is currently 2.7 percent "The cuts to benefits and tax credits for low income working people are a mistake," said Portes. "The government is quite rightly said up to now it will allow the automatic stabilisers to operate, to allow benefits to go up as unemployment has risen. So, overriding that will not only hit the individuals concerned but will also do a certain amount of economic damage as well," he added. Paul Johnson, the director of the Institute of Fiscal Studies (IFS), was also critical of the cuts to benefits. "These changes will clearly create real losses for poor households with the least ability to cope with real falls in their income." However, Johnson pointed out that since 2007 benefits had been increasing in line with inflation, because of the automatic stabilisers, while workers' incomes had failed to keep pace with inflation resulting in real-terms wage cuts. CUTS NOW, MORE CUTS IN FUTURE Osborne's autumn statement also raised questions about future policies, especially on government spending. Johnson said that it was clear that even after two and a half years of austerity and government budget cuts there were questions to be answered about spending after 2015. "The big decisions over spending allocations for 2015-16 are promised in a spending review next year. But the outline of that review is beginning to take shape," he said. Osborne protected the National Health Service, school spending and the overseas aid budget from cuts, leaving the rest of government spending to bear the weight of cuts. Johnson said, "Roll forward to 2017-18, and if the NHS and schools continue to be protected, and no more welfare cuts or tax rises are found, then these unprotected spending areas -- police, local government, defense, environment and transport -- face cumulative real terms cuts of 16 percent in the three years to 2017-18, or cuts of nearly a third since 2010." Johnson said that looked "close to inconceivable", and forecast that "further welfare cuts and tax rises must be on the cards. 27 billion pounds (about 43 billion U.S. dollars) worth would be required to protect other spending in real terms." Serious questions still need to be answered about what the government would do about spending on health and welfare, which accounts for half the budget.