Osborne rips up his ‘new economic model’
The fallout from the Budget has focussed on the winners and losers – the stealth ‘Granny Tax’, the cutting of the 50p rate and the continuing debacle that is child benefit reform. The new growth forecasts from the Office for Budget Responsibility have received relatively little attention. Given that the headline numbers show very little change, this is perhaps unsurprising. Growth in 2012 was nudged upwards whilst growth in 2013 revised down a touch, but beneath these headlines a far more interesting picture emerges: the ripping up of the Chancellor’s much touted ‘new economic model’.
George Osborne delivered the Mais Lecture in February 2010, in which he set out his economic philosophy and provided the blueprint for his future chancellorship. Aside from its adherence to the now widely discredited notion of ‘expansionary fiscal contraction’, the speech was notable for what Osborne dubbed his ‘new economic model’. Osborne outlined a vision of an economy driven by savings and investment rather than debt – whether consumer or government. Raising investment was seen as the only sure route to future growth:
“When our households, our banks and our government are so indebted, raising the real rate of return on investment is the only sustainable route to prosperity.”
In June 2010 the OBR forecasts that accompanied his first Budget showed how this model would work in practice. After sluggish growth of just 1.4% in 2010, business investment in 2011 was set to soar by 8.1%. This would be followed by even more rapid growth in 2012, when it was forecasted to increase by only 10%.
In practice, this hoped for upswing in investment failed to materialise. In 2011 the ONS data showed that business investment actually fell by 2.0%, a disappointing turnout by any measure but even worse when set against the rosy forecast of June 2010.
Back in November last year, the OBR forecasts that accompanied the Autumn Statement continued to point to strong – if somewhat later than expected – growth in business investment. They now forecast that it will grow by 7.7% in 2012 and continue to pick up pace until the end of their forecast period in 2016. Overall growth in 2012 was predicted to be weak, but it was to be driven by business investment, which would contribute 0.6% to the total growth of 0.7% (or 85% of all growth in 2012). These growth figures might be weak, but at least they would be following the blueprints set forth in the ‘new economic model’.
The forecasts released this week present a very different picture. Business investment is now expected to grow by just 0.7% in 2012 and has been revised down in every year of the forecast. This year, rather than providing 84% of all growth, it will now provide only 12.5%. Whilst the OBR do still expect business investment to pick up in 2013 and subsequent years, they now expect it to be much slower than previously. And crucially it now plays a much smaller role in driving growth: just 12.5% in 2012, 25% in 2013 and around one third in 2014, 2015 and 2016.
Under the OBR’s new projections, business investment is no longer the key driver of growth it was once hoped to be. In fact private consumption will now drive over 50% of all GDP growth in the period to 2016. The household savings ratio (the percentage of their income that households save) is forecasted to fall every year from 2012 until 2016. By the second quarter of 2014 the household sector is expected to become a net borrower from the rest of the economy. This all seems suspiciously like the growth before the crash that Osborne explicitly set out to avoid.
For all the government’s talk of ‘rebalancing’, the OBR’s latest forecasts show that the ‘new economic model’ is remarkably similar to the old one, with weak business investment, a reliance on consumption and disregard for how that consumption is paid for.
Osborne ended his Mais Lecture two years ago by saying:
“I have set out the benchmarks against which we can be held accountable. Our ambition is nothing less than a new economic model for Britain. Let us move from an economy built on debt to an economy that saves and invests for the future.”
By his own benchmarks he is failing, and should be held accountable.
Duncan Weldon is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.