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3 things you need to know about the Autumn Statement

3 things you need to know about the Autumn Statement

James Meadway
Senior Economist

Autumn Statement 2012: Our analysis of George Osborne's speech earlier today.

1. The Government’s economic policy is failing on its own terms

The government’s Office for Budget Responsibility (OBR) has revised its forecasts for the economy downwards. In other words, the economy is doing worse now than the OBR predicted just a few months ago, let alone what the OBR forecast back in 2010. Back then, the OBR thought we would be entering the broad, sunlit uplands: business booming, exports booming, unemployment falling and 2.8% growth.

The reality is a 0.1% shrinking. That shrinking means, in turn, Osborne has failed in his sole economic task: to hit his two targets on government debt, and the deficit. He can pretend to have hit the deficit by stretching the number of years over which the target applies – exactly the kind of statistical chicanery that Osborne was so sharp on in Opposition, and exactly the kind of meddling the “independent” OBR was meant to avoid. The debt figure is harder to avoid. Osborne was forced to admit he has missed his own national debt targets.

Government policy is failing on its own terms and the reason for this is simple: the worst single thing a government can do in a recession is cut its spending. Spending cuts cripple real economic activity, shrinking the economy. Falling tax revenues, the result of a decline in real activity, are the biggest culprit behind Osborne’s failure to meet his targets. That failure is entirely self-inflicted.

2. The wrong people are paying for the economic crisis

After the backlash from this year’s Budget, the Chancellor has been quick to stress once more that we are all in this together. This was a joke in 2010. It is a sick joke today. Some window dressing measures will not compensate for slicing 5% off the top-rate of income tax – paid by the richest 1% - back in March. That measure alone gave an extra £42,500 a year to anyone earning over £1m annually.

This is most stark with the decision to freeze welfare spending in real terms. This is plainly vindictive: it raises relatively little revenue – just £3.7bn – but is virtually a guarantee of misery for hundreds of thousands. Meanwhile, big businesses will see corporation tax fall to 21% by 2014.

The Treasury’s own distributional analysis shows just how regressive this Autumn Statement is. Everyone loses money. But the bottom 30% will lose double what the top 30% do. We are not all in it together.

3. We need an economic strategy that invests in our future

The Coalition claims it is investing for the future, with £5bn of extra capital spending scheduled for the next few years. This will be paid for by further cuts for already had-pressed government departments. Cutting current spending to pay for capital investment when the government can borrow at near-zero interest rates is a mindboggling piece of economic mismanagement. Borrowing to invest is what businesses do all the time. There is no good reason why government should not do the same.

Nor is much of that capital investment going to prepare us for the future. Building extra roads will increase our dependence on cars and so on oil at exactly the moment at which oil supplies are looking constrained – to say nothing of the wider commitment to tackling climate change. An extra £600m for scientific research will surely be welcomed: but this comes after Osborne cut real-terms science funding by half in his first years as Chancellor.

The government’s policies are wrong because its priorities are wrong. We need an economic strategy that tackles unemployment, delivers good jobs and a sustainable future. In the new year we’ll be publishing a strategy that does just that.