The Spending Review. We still need an Alternative.
This week's Comprehensive Spending Review set out the political landscape to the next General Election. It was simultaneously an utterly unnecessary yet remarkable event.
It was unnecessary as 'Comprehensive Spending Reviews' should really cover several years - usually three - whereas this covers just one, and even then for a one-year period after the next General Election (so determined are the Lib Dems to decouple themselves from the toxic coalition ahead of the election), and because the Review did nothing to stimulate growth here and now.
On that, the real problem that the UK economy faces right now is a lack of demand, and here the Chancellor has done nothing. As I've argued here before, the government could address this through a fiscal loosening which is "temporary, targeted and timely", such as a temporary reduction in national insurance contributions for employers to boost the demand for labour, or could bring forward capital spending as the IMF has called for
Instead, the Chancellor has stuck firmly to a discredited Plan A. Yesterday's Spending Review was about more cuts for 2015-16. No jam tomorrow then, apart from some exaggerated claims on capital spending.
Yet it was also remarkable in that this was a Chancellor who's Plan A has been trashed after flatlining growth, lost AAA credit ratings, missed targets on deficit reduction (the government is borrowing more this year than last, not less) and painful cuts further into the future than first envisaged.
Yet somehow Osborne cobbled together yet more cuts and pain and fashioned them into something that he could try to sell as a plan that would get the British economy moving again. He even manoeuvred the opposition into accepting the 2015-16 spending figures.
There much talk of infrastructure and that mystical stuff graphene again. The capital spending figures were pushed to the limits of credibility, with gross figures being used rather than the usual net figures, so desperate was the Chancellor to make it sound like a big capital splurge was coming.
Indeed what was most depressing for me (aside from the snub to Hezza's call for a £70bn single pot for the regions where the Chancellor coughed up just £2bn after Sir Humphries in Whitehall saw off plans for a radical decentralisation) were the hugely over inflated claims on a boost to capital spending.
In fact, the £50bn infrastructure budget for 2015-16 that the chancellor spun furiously is precisely the same figure as in the 2014-15 budget, so remains constant, and in real terms is actually falling.
And this time the Chancellor tried the clever wheeze of giving gross rather than net figures as is the customary way such things are presented. This is important as the gross figure excludes depreciation charges to account for the deteriorating state of existing infrastructure. Overall, on a net basis, capital spending is nearer £25bn rather than the £50bn presented.
Of course we heard a lot more today from Slasher's mate Danny Alexander on those infrastructure projects. Many of the planned projects are very welcome - such as the planned £3bn to build 165,000 new affordable homes. But remember that the supposed plan covers 2014 -15 and 2015-16 so is literally over a year from staring.
This isn't the economic boost suggested by the IMF which called on the UK government to bring forward some £10bn of capital spending to get the economy moving.
In short it's not nearly as exciting as is being made out and won't go anywhere near enough to give the UK the world class infrastructure it needs to boost the economy.
More generally, so dismal has been the economy's performance that all the previous talk by Osborne of balancing the books over five years and the debt to GDP ratio being brought down and triple AAA credit ratings had disappeared from the Spending Review.
Indeed, what happened to the Chancellor's much hyped fiscal rules? When Slasher Osborne took over in 2010 he slammed the previous government's Golden Rule and promised to eliminate the structural deficit (that bit of the deficit that remains after the recession) over a five year period (i.e. including this 2015-16 period covered in the latest 'spending review').
But as the economy flatlined and tax receipts panned, this later became a rolling five-year period so that eliminating the structural deficit can be pushed further and further into the future. As I've noted before, it's not quite the 'five more years' headline that politicians usually look for.
And that debt-to-GDP ratio was meant to peak at under 80% by 2017 but will now carry on rising (owing in large part to lower GDP than forecast) and is now expected to peak at 85%.
The plan all along was to slash and burn fiscally, let the Bank of England run a loose monetary policy with low interest rates and more QE, thereby enabling both domestic business investment and exports via a competitive pound, thus enabling the economy to 'rebalance'.
By now Osborne had expected growth and the opportunity, 1980s-style of tax cuts ahead of the 2015 election to soften the pain and ease back into government. Well it hasn't really worked out, for all the reasons I've banged on about in numerous blogs here at the Birmingham Post.
While the latest OBR figure suggest that double dip never actually happened (we just flatlined instead), the 2008-9 recession was deeper than previously thought and the UK is still some 3% below pre-recession levels.
Since the downturn started the recovery has been the slowest in a hundred years and has been worse even than that after the 1930s Great Depression. Real incomes are still falling, and the much heralded rebalancing and 'march of the makers' stalled some time ago.
So far it hasn't worked. And the plans for after 2015-16 (the period covered in yesterday's review) look almost impossible to achieve. With certain areas of spending ring-fenced, such as the NHS, then the scale of cuts to other departments up to 2018 - including education - look huge. Expect more taxes whoever wins the next election, despite what politicians from all parties actually say.
We still need an alternative plan. On that, have a look at the recent Compass Plan here
Professor David Bailey works at Coventry University Business School